January 2021 - Rise to Peace

January 8, 2021 by Arman Sidhu

What Does Future Trade Look Like in Light of the Afghanistan-Pakistan Transit Trade Agreement?

Following several months of talks between trade representative from Pakistan and Afghanistan, the two countries appear poised to finalize a preferential trade agreement (PTA) by the end of January, just one month before the Afghanistan-Pakistan Transit Trade Agreement (APTTA) is set to expire. Previous discussions have struggled to resolve numerous trade-related concerns raised by both sides, leading to a sharp decline in bilateral trade between the two countries last year.

Trade remains one of the more complex aspects of the relationship between Islamabad and Kabul. Complaints of extortion by government officials, customs obstacles, and insecurity has culminated in frequent border closures, compelling both sides to seek costlier alternative transit routes and ink multilateral trade deals that exclude one another.

For Pakistan, the opportunity to cultivate strong trade linkages with Afghanistan has little to do with access to the Afghan market. Instead, Pakistan views Afghanistan as a gateway to the more lucrative markets found in China and Central Asia. Having borrowed billions to improve its own transport infrastructure, Pakistan’s economic success is contingent on directing the flow of goods to its maritime ports, particularly the port of Gwadar. As the flagship project of the China-Pakistan Economic Corridor (CPEC), the port of Gwadar is particularly useful to landlocked Central Asian states like Kyrgyzstan and Uzbekistan, each of whom have seen their South Asian trade aspirations hindered by over 40 years of instability in Afghanistan, which remains the critical bottleneck in linking South and Central Asian supply chains.

Though it has spearheaded a near 26-year old attempt to circumvent Afghanistan via the Quadrilateral Traffic in Transit Agreement (QTTA), Pakistan still remains Afghanistan’s primary trading partner, accounting for over 40% of all Afghan exports. Furthermore, Pakistan’s motives in maintaining a stable relationship with the Afghan government stems from its stake in the outcome of ongoing intra-Afghan dialogue. Given the strong possibility of the Taliban converting into a recognized political party in a potential peace deal, Pakistan’s post-conflict relationship with Afghanistan will depend on its ability to operate within the Afghan state, giving it an opportunity to supplement its support base from the Taliban by appealing to a wider coalition of parties and officials.

In spite of their differences, both sides continue to affirm the need and desire to strengthen bilateral trade ties, particularly as it relates to formalizing border markets across the porous and insecure Durand Line. Border skirmishes remain a critical point of contention, as seen with instances like the July 2020 clash that resulted in the deaths of 15 Afghan civilians as well as Pakistan’s unilateral decision to build a 2,600-kilometer border fence that is scheduled to be completed in less than two months. For decades, trade talks have zeroed in on border issues, including the desire to formalize the booming black markets that have proven profitable for traders and militants that traverse the Durand Line to traffic stolen goods, arms, drugs, and humans.

To Pakistan’s chagrin, the Afghan government has been unwavering in its demand to incorporate the trade of Indian goods in the terms of its deal with Pakistan. Lobbying pressure from Afghanistan’s private sector and industry groups have demanded that their government work out an arrangement that would allow Afghan traders to use overland routes through Pakistan to access India via Wagah border, which splits the Indian and Pakistani halves of Punjab province.

Among the main gripes cited by the Afghan business community include inadequate market access and expensive transit costs in its trade with India, which is Afghanistan’s second largest trading partner. The existing trade routes available to Afghanistan and India include an expensive air corridor and the circuitous use of Iran’s Chabahar Port. Barring an abnormal modification in its foreign policy, Pakistan is unlikely to grant accession to such a provision, making it likely that the status quo will persist unless Afghanistan can make several favorable concessions to Pakistan.

The nature of the Pak-Afghan trade relationship underscores the formidable obstacles to both intra-regional trade within South Asia and extra-regional linkages between Southern and Central Asian supply chains. In spite of its natural geographic advantages and the potential for mutually beneficial trading arrangements, the essential prerequisite lies with the trajectory of intra-Afghan talks, where Pakistan remains the most important foreign stakeholder. In the absence of a political compromise, the litany of trade woes afflicting both sides are unlikely to fade, exacerbating infrastructure gaps and the ability to attract and sustain investment to the region, putting it at a further disadvantage to other emerging markets.

January 3, 2021 by Arman Sidhu

The Kafala Controversy: Migrant Labor Reform in the Gulf

Among the seismic economic changes to emerge in the twentieth century, few were as drastic and consequential as the growth enjoyed by the member-states of the Gulf Cooperation Council (GCC). Prior to the discovery of its expansive oil wealth between the 1930s-1950s, the GCC states (Saudi Arabia, Qatar, Bahrain, Oman, Kuwait, United Arab Emirates) largely depended on subsistence agriculture, reflecting the nomadic lifestyle that defined the region’s economic and social fabric.

The subsequent increase in foreign investment and the accrual of resource wealth in the decades to follow bolstered much of the bloc’s economic activity, paving the way for other non-oil sectors, like construction and services, to flourish. However, given the constraints from the local labor force and the workforce demands of such sectors, the GCC states were ultimately compelled to import their manpower, relying instead on exported labor from the stagnant economies of South and Southeast Asia.

Such conditions explain the origins of the widespread, yet controversial kafala labor system that continues to power most of the GCC economies. Under this system, ambitious workers ranging from the Indian subcontinent to the Philippines, are brought to the GCC states by private sponsors to fulfill labor demands for areas like domestic help and construction activity, incorporating everything from infrastructure projects and housing, to glitzy skyscrapers and sporting stadiums, including facilities that will be used in the 2022 FIFA World Cup, hosted by Qatar.

Though the practice of importing labor surpluses from other countries is commonplace, the tenets of the kafala system underscore grave concerns for the well-being of GCC migrant workers. Much of these concerns stem from the substantial level of privatization involved in the kafala system, shifting the onus for accountability of migrants and their living/working conditions on the private entities. Though the exact level of privatization varies between the GCC states, the common method cedes considerable control over migrant workers by their respective sponsors, which can include businesses and/or private citizens. In the absence of vigilant state-led monitoring and regulatory efforts, sponsors maintain an unhealthy amount of leverage over their workers, creating opportunities for exploitation with little to no legal recourse for migrants.

Allegations of abuse run the gamut, from seized passports and exit restrictions, to squalid accommodations and dangerous working conditions. While such experiences are well-documented and have been reported upon extensively by countless NGOs and media outlets, the allure of high-wage employment continues to attract a substantial number of migrants to the Gulf region, many of whom send remittances that benefit the economy of their respective home country.

The concerns raised by international labor and human rights organizations, coupled with diplomatic pressure, has led to modest improvements in the last decade, with some GCC states contemplating and implementing more significant reforms this year. Yet, the impetus behind these reforms is not limited to the desire to avoid scrutiny. Rather, the planned reforms coincide with a cascading set of circumstances that’ll challenge the Gulf’s economic model in the years to come.

Amid low oil prices, widening fiscal deficits, and staggering youth unemployment figures, the GCC member-states face crucial questions about their development trajectories. Though oil remains integral to the world economy, demands from policymakers and investors alike has increased the call for cleaner forms of energy, with options like solar and wind experiencing a surge in capital flows as the cost of generating from renewable sources decreases. The stark reality of oil dependence can be found in the government budgets of the GCC member-states, each of whom plan and fulfill their public expenditures on the basis of assumed oil and gas prices. Given the whims of such benchmarks in recent years, several GCC member-states have been forced to choose between politically sensitive budget revisions or increases to mounting fiscal deficits.

One critical component of these deficits includes the tendency of GCC states to rely on the public sector to create jobs for their citizens, leading to chronic overstaffing. In Saudi Arabia for example, public sector pay counterintuitively dwarfs the compensation levels offered by the private sector, with the difference in pay reaching as high as 59%.

Thus far, efforts to shift job creation to the private sector have had mixed results, with employers citing payroll expenses and skill deficits as major barriers to employing citizens in private sector positions. Though the current overlap between the work performed by migrants and citizens remains relatively small, the future economic strategies of most GCC countries remains contingent on non-oil diversification, with areas like tourism, media, financial services, and trade-related infrastructure featuring prominently in most GCC “visions” and developmental plans.

Realizing such visions will require a herculean effort to diversify away from sectors that heavily rely on cheap migrant labor for profitability. Attracting non-oil foreign direct investment (FDI), remedying training and skills gaps, and even attitudinal shifts toward certain types of work, like retail, will be required to maximize opportunities available for citizens.

The pressing need to reform the kafala system is not a purely economic decision. Decades of reliance on foreign labor has resulted in demographic concerns as well, with non-nationals outnumbering the domestic populace in every GCC state, with the exception of Oman and Saudi Arabia. These figures range from the low-end of 38% in Saudi Arabia to 88% in Qatar, elevating fears of political disruptions, a threat that the GCC states originally faced in the early days of the kafala system, where migrants were first brought in from neighboring countries that experienced political upheavals and instability in the age of Pan-Arabism.

At present, gradual reforms to the current kafala system have either been announced or implemented recently in Saudi Arabia, Qatar, and Oman. Though some GCC states, like Bahrain, claim to have abolished the sponsorship practice, reality suggests more is needed for adequate protections. Establishing a minimum wage, enforcing contracts with fair provisions for laborers, and allowing migrants to change employers or leave the country without present bureaucratic obstacles have all been floated as potential solutions. By slow-walking its reforms, the GCC states risk perpetuating the status-quo, a scenario that not only hurts migrants, but poses long-term ramifications for the region’s post-oil future.

in Rise to Peace blog 0 comments