Would you be surprised to learn that Afghanistan ranked No. 1 in progress last year on the U.N.'s Human Development Index? Despite incomplete and questionable data on the country, this is an impressive achievement. A USIP panel considers what needs to be done to maintain and protect Afghanistan's progress as the U.S. and other nations withdraw most of their military troops and reduce civilian aid efforts.

Afghanistan’s Economic Prospects Linked to Political Stability, Security Developments
Photo Credit: New York Times

Since 2001, Afghanistan’s economy has grown very rapidly. Numerous roads have been constructed and rehabilitated across the country, 7.8 million children attend school – 38 percent of them are girls, healthcare is now less than an hour’s walk for most Afghans, and about 85 percent of Afghans are using cell phones regularly.  Last year, Afghanistan was ranked as the No. 1 country in the world for progress on the United Nations Human Development Index.

“It is the economic side that we, and many Afghans, are very much interested in,” Robert Saum, World Bank Country Director for Afghanistan and Bhutan, said during an April 15 panel discussion at USIP, “This relates to jobs, contribution to stability, contribution to growth, regional integration, and support for human development and poverty reduction.”

But Afghanistan’s economic development has been uneven, and Afghanistan still lags far behind many other low-income countries in social and physical infrastructure. Maintaining progress and protecting gains is going to be critical as international aid begins to drawdown and security transfers to Afghan control.

Afghanistan’s economy largely hinges on the success of the upcoming political and security transitions.  Otherwise, it is unlikely that the economy can succeed in an unstable state fraught by corruption and the persistent danger of physical attacks such as suicide bombings.

Despite these unpredictable circumstances, USAID Senior Economic Adviser Borany Penh rejected predictions of a worst-case scenario.

“Economic growth is likely to slow, but it is not doomed to collapse,” Penh said during the April 15th event. There are several actions that Afghanistan and the international donor community need to start addressing now to increase the likelihood that Afghanistan’s economy will emerge intact after most U.S. and other foreign troops in the NATO-led coalition leave at the end of 2014.

Afghanistan and the donor community need to close the financing gap, according to panelists. In 2010-2011 aid (including funding to the security sector) accounted for more than 104 percent of Afghanistan’s GDP, according to a World Bank report released earlier this year. This assistance funds many of Afghanistan’s essential services, including education, healthcare, and infrastructure. Such public spending will be unsustainable once international aid draws down over the coming year. The Afghan government and international donor community need to explore viable options to increase revenues and close the financing gap, the panelists said.

One way to ease the transition is to increase Afghanistan’s trade. Afghanistan is currently operating well below its export potential, and currently lags behind most other low-income countries. Although there are significant cross-border issues with Pakistan, there are also opportunities to be explored with Afghanistan’s neighbors to the North and to the East. Many exports do not maximize their potential due to major infrastructure challenges, but efforts should be made to expand such trade to bolster revenue, economic growth, and security, and to strengthen relations with neighbors.

Another key to increasing revenue is boosting private-sector investment. Investors are currently taking a “wait-and-see” approach. This must change; private investment must become a reality if Afghanistan’s economy is going to succeed, according to Penh, “it is critical that the government offers as much certainty as possible to investors so that they can develop in earnest more sustainable sources of growth.”

The cell phone industry, for example, has recognized a huge opportunity for investment in Afghanistan, and has seized upon it. Four of the world’s leading mobile network operators have purchased 3G network licenses over the past year, according to Penh. The participation of major private-sector investors has led to significant improvements in associated infrastructure. Investments such as these are something that should be recognized and developed further to whatever extent possible.

More than 75 percent of Afghans make their living in the agricultural sector, many of those being women. Although at times unstable with varying weather conditions, the importance of agriculture should not be overlooked. GDP will grow by more than 10 percent this year due to the success of agriculture over the past year, according USIP Senior Afghanistan Expert William Byrd. Improving the agricultural sector is an area that needs continuing focus to help to increase incomes across the country.

Secondly, development programs need to be better prioritized. The National Priority Programs (NPPs), completed by the Ministry of Finance following the London Conference on Afghanistan in 2010, “have not been prioritized enough in line with the likely aid figures,” Byrd said at the April 15 event. 

There are far too many infrastructure project proposals floating around that far exceed the funds that are likely to be available. For example, the creation of a railway system is incorporated into the NPPs. Establishing a railway system in Afghanistan would prove very costly and, in the case of most of the proposed railways, flat out uneconomic. These are the sort of programs that may currently be a political priority, but should not be an economic priority, Byrd explained. Limiting the development of programs such as the railways to levels that are more sustainable won’t be easy, but it is a necessary decision to ensure that the advances made in the last 10 years in Afghanistan’s development programs are not lost.

The result of the government’s National Priority Programs exceeding available resources leads to donors cherry picking their favorite programs, which leaves some essential programs underfunded or unfunded all together. The government has the opportunity now to reexamine and consolidate the NPP’s so that the donor community is encouraged to fund the top national economic priorities.

Providing opportunities for Afghanistan’s newly educated populations also needs to be a focus to stabilize Afghanistan’s economy. There is an increasingly weakening market inside the country for educated Afghans, especially as international organizations depart or pare their operations. Afghans could take the skills learned from these international government and non-governmental organizations and use them to start new businesses that will expand the economy. But if there is political instability or a deterioration of security, this might lead to a mass exodus of Afghans, which would further destabilize the economy.

Finally, foreign donors should be diligent about managing the expectations of Afghans over their pledges at the July 2012 Tokyo Conference on Afghanistan. The pledges made there were “stretch pledges” – the maximum amount donors were willing to provide if the Afghan government effectively improves governance and corruption. Both sides seem to have unrealistic expectations of what the government can achieve toward the standards set, and therefore how much of the pledged funding will be forthcoming, said Byrd.

The earlier Chicago meeting in May 2012 gave a much better sense on what pledges will look like from the security side, but it remains somewhat unclear how much of donor pledges will be delivered from the civilian side. Predictability is going to be very important to build political support to fund economic priorities, Fatema Sumar, Senior Professional Staff Member on the Senate Foreign Relations Committee, added during the panel discussion.

The bottom line is that the security and political transitions will be driving mechanisms for maintaining and protecting other progress in Afghanistan and will determine economic developments in the short run. However, “in the medium term, these economic issues are going to be extremely important,” Byrd said.

What do you think the U.S., Afghans, and other players can do to improve Afghanistan’s economic prospects in the next few years? Tell us your thoughts by submitting comments below.

Emily Horin works on the Afghanistan and Pakistan Programs at USIP.

 

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