economic development

Foreign Investment impact on Afghanistan peace process
 by Rise to Peace

The Role of Foreign Investment in the Afghan Peace Process

Previous efforts to invest in Afghanistan’s economic future have had poor results. But, the role of foreign investment in the Afghan Peace Process has never been more important. Afghanistan has made little progress in terms of economic development, despite the United States having spent over $24 billion on economic development and another $30 billion on reconstruction programs. Approximately 90% of the Afghan economy takes place within informal sectors. They are primarily attached to the drug trade, and over half the population lives below the national poverty line. However, the signing of Afghanistan’s peace agreement, will make it is more important now than ever before to create a vibrant economy. Economic growth would reduce poverty, a huge factor in the growth of violence or the drug economy. If Afghanistan’s economy is to develop, responsible investment is the only path forward. 

Past Investment

Past attempts to invest in Afghanistan have been largely unsuccessful. The country’s systemic corruption, lack of infrastructure, ongoing insurgency make operating even the most simple businesses a challenge. The few American companies willing to work in Afghanistan were those that received lucrative contracts from the federal government. Often, these companies caused more problems than they solved. They would frequently hire cheap Afghan subcontractors instead of doing work themselves. They would make protection payments to the Taliban to gain access to roadways and ensure their safety from attacks. And they would often leave behind poor quality work that would crumble within the next few years. A few large symbolic projects have been completed – the luxurious Aino Mina neighbourhood in Kandahar and Afghanistan’s first Toyota dealership – these are token projects of Afghanistan’s elite, not the emergence of a real economy.

What Needs To Be Done?

While the end of the Taliban insurgency will provide a more stable environment in which economic development can take place, Afghanistan will retain many of its previous challenges. To avoid the waste and failures of the past, actors seeking to invest must be hyper-sensitive to the political and economic limitations that come with doing business in the country.

The most successful development projects will be those that can reduce their reliance on subcontractors and middlemen and must provide training and a living wage to Afghan workers. They will also need to foster a workplace environment that promotes a sense of community and civic responsibility. Projects will need to begin on a small scale and will need to engage with district and provincial governors. These is needed to provide an economically feasible alternative to insurgency and the drug trade.

While meeting all of these demands simultaneously will prove challenging, there is no alternative. The Afghan economy has incredible potential for growth. If all elements of society can share in that growth, then a long-lasting peace is within reach. Alternatively, if a peacetime economy fails to support Afghan families, another outbreak of violence will be inevitable. We must invest in Afghanistan’s future but invest responsibly. 

 

 

in Afghanistan / Rise to Peace blog 0 comments
 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.

in Afghanistan / Rise to Peace blog 0 comments
 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
 by Isabella Bjorkman

How Can Afghanistan Reduce Its Aid Dependency?

While violence escalated across the country, the intra-Afghan peace talks were stalled for weeks because of difficulties agreeing on procedural issues. It has been argued that it was unlikely to see any significant progress anytime soon because neither side “has an incentive to compromise before the incoming Biden administration lays out its policy.”

A recent Rise to Peace article discusses the meaning of the United States presidential election on the Afghan peace talks and indeed, it could have a big impact depending on President-elect Joe Biden’s Afghanistan policy.

However, just a few days ago, the Afghan government and the Taliban announced that they had made a major breakthrough in the talks. They reached a preliminary deal — their first written agreement in 19 years of conflict — which allows for discussions on more substantive issues, including talk of a ceasefire.

The 2020 Afghanistan Conference

As the peace talks are taking place in Doha, Qatar, governments of Afghanistan and Finland, with the United Nations, co-hosted the 2020 Afghanistan Conference, which is a ministerial level pledging conference aiming to set out the development priorities and financial support for Afghanistan for the upcoming four years. It took place on November 23–24 in Geneva, Switzerland, and saw participation from more than 70 nations and organizations.

The issue of dependency on foreign aid is of great importance for the future of Afghanistan since the country has been dependent on foreign aid for a very long time. Regardless of the outcome of the ongoing peace talks “Afghanistan will remain highly dependent on foreign aid for the foreseeable future.” The US alone has, since 2001, appropriated an amount almost equivalent to what the US spent on rebuilding Western Europe in the aftermath of World War II. Moreover, the country depends on donors to fund at least half its annual budget, something which is unlikely to change anytime soon.

The 2020 Afghanistan Conference demonstrated the international community’s commitment to Afghanistan and donors pledged at least US$ 3.3 billion for the first year of the upcoming quadrennial with annual commitments expected to stay at the same level year-on-year. It remains clear that foreign aid is important for the future development of Afghanistan with regards to politics, peace, and security in the country. In addition, it can be a way for donors to place pressure on the parties to reach an agreement in the current peace talks.

However, there is a risk that donors are expecting the Afghan government to do more than it is able to which might jeopardize future aid. In addition, the Taliban were not invited to participate in the Afghanistan Conference, which could turn out problematic since they are a major stakeholder in the peace talks as well as in Afghanistan’s future. In turn, it might create problems should other actors appear committed to a particular Afghan administration. For the same reason, the current Afghan government might be under the impression that it does not have to compromise with the Taliban on certain points.

Addressing Corruption to Decrease Aid Dependency

A recent report shows that approximately 30% of money spent by the US on the reconstruction of Afghanistan since 2002 was “lost to waste, fraud, and abuse.” With regards to corruption, in 2019, the country ranked 173/198 on the Corruption Perceptions Index and this has a negative effect as Afghanistan tries to move towards a more peaceful and just society. It is therefore vital to address issues like corruption which essentially undermine reconstruction and development efforts. Addressing it will, over time, help reduce Afghanistan’s need for foreign aid.

Consequently, the parties involved in the peace talks must do more than agreeing to stop the violence. The talks can potentially be seen as an opportunity for a new start to “lay out a new vision for the country that can assure donors as well as the international community at large that things are going to be different in the post-settlement era.”

As demonstrated, commitment from donor countries is important, but what is of significant importance is that Afghanistan increases its own contribution to national development to convert the rhetoric of self-reliance into reality which will enable the country to, eventually, stand on its own two feet.

in Afghanistan / Rise to Peace blog 0 comments
 by Arman Sidhu

Afghan Aid Dependency: Two Alternatives for Foreign Donors

With just over 77% of its government budget dependent on foreign aid, Afghanistan’s prospects of establishing a self-reliant state in the near future appears bleak. In spite of the billions spent by individual countries and multilateral institutions, the question of how to sustainably use donor funds to embed resilience in Afghanistan has confounded policymakers for decades, culminating in several reports highlighting the country’s “phantom aid” problem.

After receiving much criticism for its sudden departure from Afghanistan in the aftermath of the Cold War, the United States has since spent anywhere from $800 billion USD to upwards of $1 trillion USD in what remains America’s longest war. Of these expenditures, just 14% is constituted as foreign aid, with 75% of this aid earmarked as military/security assistance, as opposed to economic aid.

Yet, a cursory review of Afghanistan’s developmental woes suggests many of its ailments remain tied to economic obstacles like chronic unemployment, corruption, poor provisioning of government services, and an overreliance on the agricultural sector. Incessant frustrations from the donor community have led to fatigue, which has been exacerbated by political infighting within the Afghan government, as well as an unclear strategy or criterion for when international forces may exit the country.

This perception of little to no return on investment (ROI) for Western taxpayers has made foreign aid a recurring target among populist candidates and parties demanding retrenchment from “forever wars”. In the case of the US, foreign aid to Afghanistan reached its peak in 2012 at $13 billion USD, a sum that was followed by steep cuts that now amount to just under $5 billion USD sent in 2019.

Regardless of the outcome of intra-Afghan dialogue, the continuation of gradual cuts toward aid (which began during the second of the Obama administration) seemingly conflicts with the public-facing objective of the development community, which ostensibly seeks to address underlying socioeconomic factors that feed into conflict.  USAID figures demonstrate that donors remain fixated on funding kinetic solutions to resolve insecurity in Afghanistan, as well as neighboring Pakistan, which has seen its US foreign aid inflows dwindle in a similar fashion.

A peace deal cinched with the Taliban won’t necessarily result in increased revenues or even decreased expenditures from the government. Instead, Afghanistan’s fragility suggests injections of aid will be most critical in the months and years after an agreement is reached and statecraft can begin in earnest. As the appetite toward military-aid dissipates, donors should turn to alternative financing options when allocating funds, including “Aid for Trade” and Conditional Cash Transfers.

Aid for Trade

The Organization for Economic Co-operation and Development (OECD) defines Aid for Trade as an effort “to align donor and partner countries’ strategies in promoting trade as a leverage for poverty reduction.” In short, aid for trade seeks to reduce the cost of facilitating goods and services and promote the recipient nation’s export sector by addressing infrastructure deficits and providing technical assistance to the private sector. Such a strategy has proven successful in funding efforts like port upgrades to improve maritime trade, expanding access to affordable Internet services, and digitization training for Small and Medium-sized Enterprises (SMEs).

In the context of Afghanistan, Aid for Trade can harness what has traditionally been the country’s greatest economic advantage: its geography. Notwithstanding its status as a landlocked state, Afghanistan sits at the nexus of some of the fastest-growing regions in the world, which provides opportunity to reap advantages in overland trade. Yet harnessing this advantage requires building the necessary physical and digital infrastructure that can support the reliable and safe transportation of goods withing Afghan borders.

At present, the standard mechanism for aid delivery has been conditioned on a number of restrictive measures that stipulate what can be purchased with the aid, and from whom it can be purchased from. Ostensibly, the logic behind the conditional aid was designed to create strict parameters that compelled accountability from the aid recipient. Yet, as exhibited by the “Waste, Fraud, and Abuse” reports published by the US Special Inspector General for Afghanistan Reconstruction (SIGAR), such conditions have not repelled opportunities for graft, which is often carried out through opaque procurement regimes that allow funds to disappear among the lengthy supply chain of contractors and sub-contractors.

Furthermore, conditional aid can often stipulate requirements that damage the recipient’s economy. This is particularly true in the case of food aid, where donor governments will use aid to pay their own farmers to export the products, which undercuts the prices that the agricultural sector in the recipient country can charge. Considering the fact that Afghanistan’s agricultural sector employs roughly 40% of the workforce and is responsible for contributing nearly one-quarter of the country’s GDP, reorienting aid to focus on productive investments (e.g. irrigation, equipment/materials, transportation) that lower the cost of trade is more likely to boost incomes instead of distorting local markets.

Conditional Cash Transfers

Though still conditions-based, conditional cash transfers (CCTs) differ from the status quo in that they tend to be far smaller in scope and scale. The “conditional” in this context refers to the requirement that the recipient fulfill a certain objective before the funds are released, which stands in stark contrast to other programs that deliver larger sums in shorter timeframes. The advantage of Conditional Cash Transfers is latent in the psychology of incentives, where signs of waste, fraud, and abuse can result in the immediate termination of future disbursements, giving donors more flexibility over their purse strings, while also encouraging long-term adherence to specified goals.

CCTs have proven successful in a number of policy realms, including decreasing homicides in Brazil, improving healthcare delivery to vulnerable children in Ghana, and incentivizing farmers across South America to cease the cultivation of illicit crops in favor of legal alternatives. For Afghanistan, CCTs can be especially useful in combating illicit poppy farming which fuels 90% of the world’s opium and heroin production. Though forceful eradication programs have been implemented, they have failed to make a dent in production, leading to an entrenchment and reliance on the opium trade to sustain rural household incomes.

The economic, political, and security ramifications of targeting poppy farmers has made the Afghan government reluctant to tackle cultivation of illicit crops. Yet, CCT programs provide a useful medium in establishing and sustaining evidence-based programs that have demonstrated efficacy in illicit crop eradication such as crop substitution programs supported by subsidies that are paid directly to farmers and that minimize institutional involvement.

The politicization of foreign aid is a consequence of misaligned objectives between donors and recipients, in addition to flawed and ineffectual distribution. Achieving such objectives requires recalibrating the criteria that donors use to both allocate aid and subsequently measure its efficacy. Though security remains pivotal, a lasting reconstruction agenda will depend far more on targeting aid toward economic initiatives that enable Afghans to gradually reduce their dependency on foreign aid, replacing it with sustainable revenues generated by the country itself.

in Afghanistan / Rise to Peace blog 0 comments