Saeed Parto, Director of Research, Afghan Public Policy Research Organization (APPRO) – Written evidence (AFG0026)

Submission to the International Relations and Defence Committee, House of Lords

October 23, 2020

1. What are Afghanistan’s principal economic sectors and trade relationships?

According to the World Bank, Afghanistan’s estimated GDP was 19.1 billion USD in 2019. For 2020, the projected growth is a negative 5.5 percent.[1] The projected negative growth is due largely to the impact of COVID-19 and, possibly, the uncertain outcome and consequences of the intra-Afghan peace process.

Despite being rich in mineral resources, with an estimated value of one trillion USD, the extraction sector remains largely informal, illicit and artisanal. At a formal level, efforts to regulate the extraction sector have largely failed despite various attempts driven by international donors and initiated by the Afghan government. The mining sector in Afghanistan is characterized by irregularities, lack of transparency in the tender process, influence peddling, nepotism, corruption, and loss of government revenue.[2]

Afghanistan’s licit exports in 2019 totaled 863.83 million USD, a 1.5 percent drop from the total revenue from exports in 2018. Exports account for around 20 percent of the GDP, with the main exports being carpets and rugs at 45% of the total, dried fruits at 31%, and medicinal plants at 12%.[3] The available figures for 2018 show the export markets as Pakistan for 48% of the total exports, India for 19%, and Russia at 9% with the bulk of the remainder going to Turkey, Iran, United Arab Emirates, Tajikistan, Saudi Arabia, and Germany.[4]

Trade Routes

Until 2009, Pakistan served as the main conduit for Afghanistan’s imports and exports including the import of military hardware for international military forces stationed in Afghanistan. The risks of delays in supplies including security threats against convoys carrying military and non-military goods along the transit route from Karachi and Gawadar ports in Pakistan to Afghanistan’s eastern border entry points necessitated opting for alternative transit routes.

Key Challenges

The recent intensification of the armed conflict despite the ongoing intra-Afghan peace process in Doha has a direct bearing in investor confidence and productive economic activity. In addition, poor infrastructure, inadequate regulatory framework, and poor quality of finished products continue to impede the ability of Afghan producers to compete in regional and international markets.

There is little or no infrastructure capable of producing adequate packaging in Afghanistan. Quality packaging would need to be imported, raising the total cost of production. The inability of producers to maximize value adding activities within Afghanistan, due largely to inadequate infrastructure to produce finished goods and lack of hygiene in consumables, results in unfinished products such as carpets and bulk saffron being sent to Pakistan and Iran, respectively, to be finished and sold as products from those countries. Efforts to compete in regional or international markets often fail on the account of poor quality packaging and hygiene.

While much progress has been made to lessen the monopoly of Pakistan as the main trade transit route, instability in neighboring countries and global geopolitics remain as major impediments to stability in the flows of exports and imports.

Ways Forward

Increasingly, Afghanistan has been utilizing the land to sea transit route from Afghanistan’s south east to the Chabahar Port in Iran, used for the bulk of trade between Afghanistan and India. Afghanistan has also increasingly relied on the Northern Distribution Network (NDN) connecting the Baltic and Black Sea ports with Afghanistan to deliver non-military supplies was also initiated as a main alternative transit route to Pakistan. NDN starts at the Latvian port of Riga, going through Russia, Kazakhstan, and Uzbekistan to enter Afghanistan through Hairatan entry point. The Southern NDN connects the Georgian port of Poti through Azerbaijan, Caspian Sea, Kazakhstan, and Uzbekistan to Afghanistan. A third transit route originates at the Latvian port of Riga and reaches Afghanistan through Russia, Kazakhstan, Kyrgyzstan, and Tajikistan.

More recent developments in alternative trade routes include the Lapis Lazuli Route which includes transit through Turkmenistan’s Turkmenbashi Port, Caspian Sea, Baku Port in Azerbaijan, Georgian ports of Poti and Batomi, to Turkey and then Europe.

Afghanistan formally opened its rail link to China in 2016, with the first cargo train departing from Nantong City in eastern China's Jiangsu Province to reach the Hairatan port of Afghanistan through Kazakhstan and Uzbekistan. Ultimately, this link is expected to be included in the Belt and Road Initiative initiated by China.

Afghanistan’s National Air Corridor facilitates direct trade with India (bypassing Pakistan), Saudi Arabia, China, UAE, Turkey, Kazakhstan, and Europe though volumes are considerably smaller than transportation by land on the account of much higher costs.

2. How can these be built upon to achieve the Sustainable Development Goals and create jobs and livelihoods?

The combined impact of pre-existing structural economic deficiencies, the global and local consequences of the pandemic, and persistent political instability have a heavy bearing on the achievement of SDG 1 (Ending Poverty); SDG 8 (Decent Work and Economic Growth), SDG 9 (Industry, Innovation and Infrastructures), SDG 10 (Reduced Inequalities) and SDG 5 (Gender Equality).

Prior to the pandemic, Afghanistan already displayed alarming rates of poverty and food insecurity. In 2016, an estimated 55 per cent of the population lived below the poverty line, and nearly 45 per cent were considered food insecure.[5] Current projections estimate the deterioration of the economy will result in an increase of up to 72 per cent in poverty rates in 2020, with direct effects on access to amenities and services, including food, shelter, health care and education.[6]

At the macro-level, non-agricultural economic indicators contracted in the first half of 2020 as a result of the reduced global economic activity due to the pandemic, combined with domestic structural deficiencies of the Afghan economy.

At the micro-level, the most affected by the economic consequences of the current crisis include micro and small-sized enterprises with limited or no access to finance and the vast majority of workers involved in the informal economy, including day laborers.

Women professionals, concentrated in education and health sectors, have been particularly affected by the consequences of COVID-19. In education, confinement orders and the closing of schools for seven months has increased the burden of childcare and domestic work. In the public health sector, the majority of female health workers that typically occupy lower scale jobs and operate in ill-equipped and poorly protected conditions have had to endure the added burden and risks associated with caring for COVID-19 patients. 

The uncertainty surrounding the outcome of ongoing intra-Afghan peace talks, with the prospect of a new government at least partly controlled by the Taliban, intensifies anxiety concerning the role of women in the labor market. This is particularly the case for the many young women who have benefited from higher education and have been actively engaged in professional employment in urban areas.

The institutionalized prevalence of rent-seeking behavior and endemic corruption at all levels and in all sectors is likely to continue channeling efforts and resources away from productive economic activity, tackling the pandemic, and reconstruction, toward unproductive and destructive economic activity.

Key Challenges

Afghanistan has not completely transited out of a war economy. There are systemic, institutionalized rent-seekers working through kleptocratic and nepotistic networks, parallel structures of governance that challenge and undermine the government’s ability to govern, and high return illicit economic activities including but not limited to narcotrade, illicit extraction of minerals, human trafficking, and organized crime such as kidnapping of the wealthy for ransom. A significant number of kleptocratic networks and criminals profits from the war-like economy and finds the continuation of the conflict as economically more profitable than political stability under a rule of law.

Efforts to mobilize new sources of revenue, such as extraction of minerals, can be a means to finance economic recovery through foreign investment. However, regardless of low investor confidence on the account of the armed conflict and very weak rule of law, these efforts bear high risks of increased corruption and rent seeking, and thereby, conflict recurrence.[7]

Ways Forward

Despite these persistent challenges, there is some evidence of resilience in productive economic activity, particularly in the traditional, clustered micro and small-sized enterprises (MSSEs) mostly concentrated in population centers throughout the country. While unique in their built-in sustenance arrangements and productive, value adding economic activity based on networks of traditional guilds and trade associations, these cluster continue to persist despite a lack of access to capital, modern technology and markets beyond their limited domestic reach.

One-time or short-term interventions to provide grants, whether in the form of cash or in-kind assistance, will need to be deployed by utilizing existing domestic human capital, supplemented with capacity exchange and integrated into the relevant value chain networks.

In the longer term, interventions should be designed to strengthen productive economic activity as opposed to unproductive or destructive forms of economic activity. This is perhaps the most challenging, as it must deal with structural deficiencies already aggravated by the pandemic, an uncertain peace process, and intensified armed conflict.

More broadly, gaps in Afghanistan’s value chain should be addressed by paying specific attention to domestic capacity for quality control, packaging and marketing. Preferential treatment for Afghan exports in regional and international markets will need to be considered by, for instance, reducing levies on imported Afghan goods. Support for adoption of existing international standards – on quality (ISO 9000), environmental protection (ISO 14000), social and corporate responsibility (ISO 26000), anti-corruption (ISO 37100), occupational health and safety (ISO 45000) – could result in increased appeal and attractiveness, and hence competitiveness, of Afghan goods on the international market. Fair trade labeling could also assist in providing Afghanistan with a preferred status in international market.  

Despite multiple barriers in equal opportunities for access to employment, women have been increasingly engaged in the labor market over the past two decades. As Afghanistan is at a critical juncture in the intra-Afghan peace talks, it is crucial for the international community to remain committed to its support for Afghan women to ensure that women will not once again be subjected to the draconic restrictions in all aspects of public life as they were in the 1990s under the Mujahideen and the Taliban. Integrated gender equality provisions should be a condition in the continuation of aid provision to Afghanistan.

3. To what extent are the illegal drugs trade and the grey economy still an important source of income?

Poverty and a lack of alternative licit employment opportunities to meet basic living costs are strong drivers for many who become opiate traffickers. A general lack of rule of law removes a major deterrent from consideration of many poor ordinary citizens in deciding to become traffickers.[8] Over the years since 2001, opiate trafficking has become rooted in many communities which are partially or fully ruled by armed opposition groups, particularly the Taliban. Opium production in these areas makes effective use of community networks for production and distribution and modern telecommunication for logistics. The production has also become more sophisticated with locally run laboratories processing raw opium into heroin and morphine.

The production system, tolerated in most local communities, encompasses members of local communities, local power lords, organized armed opposition groups, local markets, and corrupt government officials and security forces.

The higher estimate for the gross value of the opiate economy in Afghanistan is 6.6 billion USD for 2017 and 2.2 billion USD for 2018, the significant drop being attributed to the drought of 2018. Of this, a fraction – an estimated 29 million USD – goes to local power lords and armed local opposition groups as taxes or bribes, with the rest going to regional traffickers and facilitators outside Afghanistan. In 2018, an estimated 200,000 people in different regions of Afghanistan earned income from opium production by working as farmhands to weed, lance and harvest opium. The daily wage for these workers is between 7.70 – 12 USD, depending on the task they perform.[9]

Challenges

Afghanistan’s economy remains largely informal, a significant portion of which is linked with illicit economic activity including trafficking and other forms organized crime. Official figures regarding employment types and the levels of unemployment are unreliable and estimates are typically used to report on demography, income sources and levels, and employment.

Around 80% of the total domestic economic activity is estimated to be informal, concentrated heavily on agriculture. Vast swathes of agricultural land are increasingly used for poppy cultivation as a high return cash crop.[10]

Afghanistan is ecologically well suited for relatively carefree opium poppy cultivation.[11] The acute and chronic poverty in many rural communities, combined with the uncertainties regarding rainfed farming and periodic droughts, acts as a main driver for many poor farmers to invest their limited land and other resources in opium cultivation as the crop with the lowest risk and highest cash return.

Other complicating factors are the roles of regional trafficking networks, particularly those active in Iran and Central Asia, both serving as the gateways to Europe and beyond.

Managing, and reforming, the predominantly informal Afghan economy is at best difficult in the absence of an effective rule of law, a legitimate government, and at least a significant lessening of open armed conflict in most of the country.

Ways Forward

Although heavily contested, limited or full legalization of poppy cultivation and state purchase of the opium produced for pharmaceutical and other legitimate purposes need to be explored – bearing in mind the limited capacity and reach of the government and rent seeking behavior and criminal activity by government and non-government entities alike.

Support for maintaining public service in health, education and formal justice will need to be maintained and expanded as a means to attend to the most basic needs of the citizens while providing licit, formal employment for the increasingly educated young Afghan men and women.

A major type of licit, resilient, and productive economic yet mostly informal activity is represented by micro and small-scale enterprises in geographically identifiable clusters within most population centers throughout Afghanistan (see above). Clustered MSSEs need to feature more centrally on the agenda for immediate and longer term economic development planning for Afghanistan.

4. How can Afghanistan move away from aid-dependence?

Major factors in the current status of Afghanistan are the ongoing conflict, attempts at bringing peace, aid dependency of the Afghan government and non-government actors alike, and the pandemic placing unprecedented pressure on the already weak structural and institutional arrangements. Compounding these factors is endemic corruption, deep-rooted misogynous views of women in society, environmental degradation and threats from climate change, the latter being the main driver of internal displacement.

Interventions to assist Afghanistan in strengthening its economy and reduce its aid dependency will require adjustments in the short term to address emergencies such as treating the sick and providing food security and shelter, in the medium term to compensate for the loss of income of the many borderline low-income families who can no longer earn a living due to the weak economy combined with intensified armed conflict and the pandemic, and in the longer term to increase the resilience of productive economic structures.[12]

Reducing aid dependency will also require significant change in modalities of aid provision by international donors to Afghanistan. To date, the international aid providers have focused on functional accountability to account for the use of resources, i.e., inputs and outputs, and reporting on meeting procedural and administrative requirements, rather than strategic accountability processes focused on outcomes and impact through behavioral and institutional change.

The current arrangements consolidate and reinforce aid-dependency of local and international NGOs and lessen the ability and willingness to dissent from donor-imposed priorities and modes of operation. Reporting on inputs and outputs, while important, needs to be accompanied with reports on outcomes and impacts. The current arrangements leave little or no room to question the effectiveness of donor-supported interventions or advocate for alternative types of intervention.[13] (Martin and Parto, 2020; Ebrahim, 2003).

The potential decrease in international aid after 2020 raises important questions about how aid provision modalities could be rethought to facilitate cooperation and collaboration and shift focus from activities and outputs to impact and sustainability.

In the short-term, evaluations, currently used almost exclusively for upward accountability from NGOs to donors, could be fruitfully used for downward accountability, making NGOs more accountable to the communities they serve, and donors more accountable to NGOs. In the longer-term, social audits incorporating stakeholder dialogue at all levels can contribute to improved performance: internally, in terms of monitoring performance and increasing organizational learning, and externally, by improving accountability toward stakeholders downstream to communities and upstream to donors. These efforts would need to aim at generating reliable and verified evidence, rather than disseminating “success stories” and unverified anecdotes.[14]

Focus on downward strategic accountability will require long-term investments by international donors in financial and human resources of local NGOs to capacitate both local and international donors in developing, revising, integrating and/ or strengthening systems for analyzing and reporting on efficiency, effectiveness and impact. In addition, local actors, whether government or non-government, need to work toward a mutually recognized “common good” as the focus of their collective activities, rather than how much funding they can secure.[15]

Faced with the inability or unwillingness of Afghanistan’s government to effect an inclusive, transparent and accountable mode of governance in all matters pertaining to peace negotiations and fighting the pandemic, civil society writ large and the international donors that support them have a unique opportunity to do new things and expect better results. To this end, the following key objectives need to be met:

1. Using the COVID-19 crisis and the peace negotiations as opportunities for practicing good governance in aid decision making and provision and public policymaking.
2. Defining new modalities and priorities for international aid in Afghanistan beyond the intra-Afghan peace process and COVID-19
3. Supporting resilient, productive economic activity
4. Enabling and empowering civil society beyond their current status of local implementers to active governance stakeholders

Meeting the above objectives will require efforts to effect dialogue on how best to address the following questions in the short, medium, and long terms: 

Short term: In interventions relating to the pandemic and the peace process, what combination of aid provision, from on-budget funding, off-budget funding through multilateral mechanisms such as ARTF, and direct funding of national non-government entities should be aimed at?

Medium-term: How would a peace agreement, or failing to reach peace with the Taliban, affect the modalities of international aid provision for Afghanistan?

Long term: What can be done to shift the focus from upward functional accountability to downward strategic accountability?

Received 23 October 2020