Afghanistan desperately needs new investment—and a reversal of its current capital flight—to improve governance, build the economy and provide hope for a population exhausted by decades of war. While conventional wisdom holds that the best stimulus for the economy would be an end to the violence, Afghan business leaders suggest that the most urgent remedy would be to reduce administrative and political obstacles, including corruption.

Men negotiate money exchanges at a market in Kabul, on Jan. 29, 2011. The large, informal, market is crucial to the economy in a country where many of the poor do not use banks. Potential losses of as much as $900 million at the Kabul Bank could deepen distrust of banks in the country. (Michael Kamber/The New York Times)
Photo Courtesy of The New York Times/Michael Kamber

In Kabul earlier this year, I asked business owners, research firms and international officials about the economic problems caused by Afghanistan’s continued violence.  Often, they turned the conversation instead to government policy. Businessmen (only 2 percent of businesses include female ownership) described problems with licensing, taxation, legal arbitration, immigration and customs. These administrative problems, they explained, have a greater daily impact on business and the economy than do attacks by the Taliban and their allies.

“Some businessmen described extortion by government officials that they said was as bad as physical violence.”

A U.S. official estimated that businesses spend 20 times more effort on administrative matters than on security risks. According to the World Bank, it takes at least 50 percent longer in Afghanistan to get a construction permit (323 days), export goods (86 days), or enforce a contract (1,642 days) than it does in the South Asian region as a whole. Firms surveyed by the bank for an October 2014 report identified political instability, corruption and access to land as the top barriers. They cited “crime, theft and disorder” in sixth place.

And even when violence is the problem, Afghan business leaders said, it is only sometimes caused by the Taliban. A construction company’s CEO did tell of a building contract for the U.S. Army Corps of Engineers that was cancelled after the fourth rocket attack on the construction site. But many described other threats. A trader in Afghanistan’s famous handmade carpets said he invested less in his business due to insecurity on the roads, including from criminals. A rare Afghan businesswoman, who owns a party dress store in Kabul, said she sends a male employee down the street to buy fabric because she would face the risk of harassment or gender-based violence by men if she went out herself.

Some business owners described extortion by government officials that they said was as bad as physical violence: “A nice setup you have here,” was their message. “It would be a shame if anything bureaucratic happened to it.” One executive, whose company was hired by the government to conduct technical inspections of imported goods at Afghanistan’s borders, reported that officials harassed the firm and tried to obstruct its work, complaining that it interfered with their ability to extort bribes from importers.

Dismantling the bureaucratic blockages to business will require administrative reforms, but the “national unity government” co-led by last year’s election rivals, President Ashraf Ghani and Chief Executive Officer Abdullah Abdullah has itself been gridlocked, USIP experts noted last month in a forum in Washington.

Capital Flight

USIP’s senior economic analyst on Afghanistan, former World Bank official William Byrd, buttressed the Kabul business owners’ message -- that good governance is the top priority -- in a recently published PeaceBrief.

“Attracting Afghan capital back from other countries and encouraging private investment would provide an economic boost and thereby increase revenues,” Byrd wrote. “This could only be enabled, inter alia, by much more positive business perceptions … of the effectiveness, political stability and longevity of the current administration.”

Afghan citizens reiterate the message. In last year’s version of the Asia Foundation’s broad, annual opinion survey, they said that governance problems, notably corruption, are just as important as the country’s security ills. Governments and international institutions often try to deal individually with the multiple problems of fragile and conflict-affected states, focusing their projects on security, promoting investment or improving the rule of law. But the interconnections among such issues demand more holistic solutions.

USIP’s Economics and Peacebuilding Program is currently studying how economic activity, specifically investment, relates to violence. Our research will answer policy-relevant questions: Can economic indicators help predict future violence? What policies best promote investment amid insecurity?

For this research, the recent months’ interviews in Kabul are helping us develop hypotheses. The next challenge will be testing these hypotheses in a setting where good economic data are hard to come by. We are exploring innovative survey techniques combined with new data sources, such as mobile phone usage, to shape research that can push our understanding of Afghanistan beyond conventional wisdom.

Thomas Leo Scherer is a senior program specialist in USIP’s Economics, Business and Peacebuilding program.

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