trade

 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.

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 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.

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 by Arman Sidhu

Trade, Aid, and a Self-Reliant Afghan Economy

At first glance, a chart depicting Afghanistan’s annual Gross Domestic Product (GDP) figures since 2001 could be characterized as a series of peaks and valleys. Though the imagery may be fitting with the country’s landscape, probes into why Afghanistan’s year-to-year growth is erratic necessitates a deeper look into the country’s trade practices, as well as the management and deployment of foreign aid.

While incessant conflict with the Taliban certainly plays a formidable role in deterring investment, it is far from the only ailment afflicting Afghanistan’s path toward economic independence. As one example, foreign aid still accounts for nearly 77% of the government’s budget, and that includes an assumption of a best-case scenario involving collected revenues.

Furthermore, Afghanistan’s increased engagement in global trade has yet to materialize any substantial capital investment, which is necessary for industrializing the economy and building a sufficient manufacturing base. The country’s trade deficit has also widened considerably in the last decade by nearly 25%.

Such conditions suggest that even in the event of successful intra-Afghan talks, the country’s development agenda will still rely heavily on substantial foreign aid inflows, with the World Bank estimating between $6-8 billion USD will be needed annually over the next several years. In order to best facilitate the use of that aid, both donors and the government will need to be selective in projects that incorporate broader participation from Afghans and put the country on proper footing for self-reliance.

To achieve this, Afghanistan’s economic policy will have to focus on three key prerequisites. These include an emphasis on export-led growth, diversification of trade partners and investors, and improvements toward tax revenue mobilization.

Export-Led Growth

Export-led growth is a strategy that concentrates on boosting the export potential of domestic businesses that specialize in certain goods and services. Assuming a comparative advantage for developing these certain products exists, the revenues and profits earned from exports are then to be reinvested in the country to expand production capacity and nurture the development of supporting industries. This method of economic policy was principally responsible for the rapid expansion of East Asian economies and remains in favor today among emerging markets across Southeast Asia and Sub-Saharan Africa.

For Afghanistan, exports have historically been limited to agricultural products (mainly fruits) but given the country’s vast reserves in minerals and natural resources, the opportunity for industrialization will be contingent upon proper management of the extractive sectors. The benefits would include the absorption of labor from agriculture as well as a diffusive investment that would support infrastructure projects and generate demand for businesses and employment across the manufacturing and services sectors.

In the past, several donor-led initiatives focused on the establishment of “resource corridors” have been put forth but have been shelved as a result of insecurity and dampened foreign investor sentiment on the country’s prospects. Nevertheless, should intra-Afghan talks prove fruitful in resolving the insecurity, it would clear the most significant obstacle for the extractive industries.

Diversification of Trade Partners and Investors

Currently, Afghanistan ranks 173rd out of 190 countries on the World Bank’s Ease of Doing Business, an index that uses indicators including the time required for permits and licenses, access to credit, and the enforcement of contracts, among other criteria to gauge the business/investor climate. As a result, inflows of foreign direct investment (FDI) in the country remains scarce and concentrated among a handful of nations, most of them neighbors. Afghanistan’s export destinations are in a similar position, with India and Pakistan accounting for a combined 75% of all Afghan exports. Imports are more diversified in terms of sourcing, but the trade imbalance has been costly in the absence of any progress on an import substitution strategy.

While the debate on the harmful effects of a trade deficit remains unresolved, curbing Afghanistan’s import reliance could help it bolster homegrown industries. Agricultural products and textiles makeup a significant portion of Afghan imports, yet domestic potential already exists in these sectors. Hence, these sectors, if prioritized, could rank among one of the simpler transitions available to the country’s economy.

The textile industry is also a common and vital source of employment for female labor and allowing wider participation by females can pay dividends by providing additional economic security for households, a boost in consumption, and accelerated growth via a larger labor pool for the country.

Ensuring quality over quantity in FDI is commonly overlooked by recipient nations, particularly those endowed with natural resources. Oft-cited criticism of foreign investor practices include employing or awarding contracts to the investing nation, with little to no benefit for the domestic workforce or businesses. Stipulating stringent quotas for the contracting and employment of Afghan businesses and nationals is a crucial tool that can be leveraged when vetting potential foreign partners.

Given Afghanistan’s strategic (and volatile) location, diversifying the country’s trade partners and investors remains in its best interests for long-term growth. This directly ties in with a balanced foreign policy based on non-alignment. Given the competing interests of regional hegemons like Russia, China, India, and Pakistan, the ability for Afghanistan to deftly balance external relations without committing to a single side ensures sovereignty and self-reliance.

Mobilization of Tax Revenue

At present, the shortfall between the Afghan government’s annual budget and its revenues stands at roughly $8.5 billion USD, which is covered by foreign aid. A gradual paring of that figure will necessitate a more efficient collection and allocation of tax revenues. In tandem with taxes, Afghanistan’s role as a transit hub for pipelines and infrastructure that transports resources (like natural gas) is another opportunity to improve revenues.

In a scenario where peace is established, ensuring that the Taliban’s arbitrary tax regime is dismantled in favor of a government collection system will be vital to increasing government revenues. In addition, the ability to safely access and incorporate swathes of Afghan territory under the government’s jurisdiction will present new opportunities to improve the fiscal situation of the government and locals. However, the notion of a “peace dividend” will not be without costs. As exhibited by US troop withdrawals throughout the Obama Administration, any additional drawdowns could once again trigger economic consequences for businesses that engage with or rely upon foreign forces.

It remains pertinent that the government learns to wean itself off of foreign aid and prove to its donors it is capable and sophisticated enough to budget and allocate aid funds efficiently. Doing so would contribute positively to what will be a long, but viable, route toward genuine independence and lasting stability.

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