Alexander KNYAZEV (Russia)
It is not easy to understand what is happening in Afghanistan today. Everything here is like a tangled ball of yarn: there are numerous clans warring among themselves; there is no single center of power; and the country has a puppet government, a foreign military presence and a criminalized economy…
About 15 million of its approximately 22.2 million population are economically active. Around 80% of its workers are employed in agriculture (14.3% are believed to be engaged in drug trafficking); 10% work in industry, and 10% in the service sector. The workforce is not well trained: according to Afghan authorities, only 28.7% of the population over 15 years of age are literate. According to the Office of the Asian Development Bank in Afghanistan, the unemployment rate for men is 40%, and for women it is 60%. The unemployment rate among youth is very high and continues to grow because Afghanistan has virtually no vocational education system.
The GDP (including estimated drug revenues) is about $6 billion; the economy’s rate of growth is 2.3%.
About 58.1% of those engaged in agriculture work their own land; another 14.6% lease a parcel of land; 14.2% are sharecroppers; and 11% are day laborers. Farming is the main source of income for only 37% of the country’s population: many rural residents say they earn their living by unskilled hired labor.
The productivity of Afghanistan’s agricultural sector is extremely low. Even in relatively good harvest years, agriculture does not fully meet the country’s food requirements. Yields here are dependent on annual precipitation levels. The drought in 2004 put Afghanistan on the brink of a famine, and the relatively good harvest in 2007 met 91% of the country’s domestic needs. By definition, however, Afghanistan cannot count on that happening every year.
Only 12% of the agricultural land in Afghanistan is artificially irrigated, and those are the fields that provide more than half of the wheat harvest (about 64% in 2007). Irrigation is primarily accomplished by flooding the fields, that is, the maximum capacities of water sources are used without regard to irrigation norms (as a rule, water is supplied from rivers or wells through canals). Irrigation consumes approximately 21 km³ of water, or about 32% of the total streamflow. Of that, 17 km³ are nonrecoverable losses. In addition, the wars of recent decades have destroyed many kilometers of qanats—ancient traditional underground water collection channels.
Afghanistan is one of a number of countries with increasing water demand and a growing water deficit. Its total water resources comprise about 276 km³. Of that, 190 km³ are in glaciers, 22 km³ in lakes and reservoirs, and only 64 km³ in rivers and streams.
Very little use is made of fertilizer and agricultural machinery. Losses at harvest amount to 20% because agricultural operations are poorly organized. The index of agricultural production dropped from 2.2% in 1978 to 0.2% after 2001.
Afghanistan’s manufacturing industry is relatively efficient—20% of GDP for 10% of its workers. Its main industry is textiles, which comprises a significant share of the country’s legal exports. The best known of the existing companies is the state-owned cotton factory in Kunduz, which ceased operation in the 1990s but reopened a few years ago. Next in significance are the processing of farm produce and the production of beverages and foodstuffs. The leading companies are the Nazar soft drink factory in Mazar-e-Sharif, the Coca-Cola plant in Kabul and several processing plants in the vicinity of Kandahar owned by Ettehad Groups.
The majority of Afghan food and manufacturing companies are actively seeking contacts with Western investors prepared to invest in modernizing and expanding production. Such projects are quite promising, as the Afghan market is far from being saturated. On the other hand, modernization is held back by the extremely low skill level of the workforce. Manufacturers compensate for this shortcoming with high labor intensity and poor occupational safety; as a result, the quality of many of the goods produced in Afghanistan leaves much to be desired.
The tender to develop the rich Aynak copper deposit in Logar Province should be regarded as an important development. Its reserves are estimated at 240 million tonnes of ore; the copper grade is 2.3%. A Soviet geological survey team worked in Logar from 1973 to 1974. It prepared a geophysical description of the deposit, which geologists estimated at approximately 11 million tonnes of copper. In 2003, specialists from the British Geological Service conducted a new geophysical survey of the deposit. Experts from the US Geological Service also participated with the Pentagon’s support. In early 2006, the Afghan Ministry of Mines announced that the Western experts had generally confirmed the findings of the Soviet geologists, and they announced that Aynak is one of the world’s largest copper deposits. The World Bank then gave the Afghan government a $30 million grant to develop a regulatory framework for licensing mining activities and hold a competitive tender for development of deposits, including (and primarily) the Aynak deposit.
Nine companies from the United States, Canada, Russia, Kazakhstan and China participated in the tender. Nine out of the 13 bidders made the short list, including two Russian companies— state-owned Tyazhpromexport and Soyuzmetallresurs (a subsidiary of Base Element). China Metallurgical Group Corporation was the winner; it is prepared to invest $2.9 billion to develop and mine the copper. The Chinese have also committed themselves to building a 400 MW coal-fired power plant at their own expense to supply the mine and ore processing plant with electricity as well as a railroad linking Aynak with the cities of Hairatan and Torkham. The Chinese consortium plans to start mining and processing copper ore by 2012. Annual production of copper should come to 220 thousand tonnes. Annual payments for the right to exploit the deposit will amount to $400 million.
The Afghan government estimates that development of the Aynak deposit could bring $88 billion into the country’s economy. Also, it will create jobs: 5000 mine and power station personnel, and another 15 to 20 thousand in adjoining facilities. In addition, another 4 thousand people will lay a railroad to the Pakistan border, and several thousand guards will provide security.
Afghanistan has more than 100 power plants. The largest are the 100 thousand kilowatt Naghlu hydroelectric station, the 66 thousand kilowatt Mahipar hydroelectric station, the 33 thousand kilowatt Kajaki hydroelectric station, the 22 thousand kilowatt Sarobi hydroelectric station, the 48 thousand kilowatt thermal electric plant in Mazar-e-Sharif and the 120 thousand kilowatt thermal electric plant in Kabul.
The United States is currently restoring and upgrading the Kajaki hydroelectric plant they built in Helmand Province during the 1960s, and Russia is doing the same for the Naghlu hydroelectric plant on the Kabul River that Soviet experts helped build during the same period. The contract to upgrade the Naghlu hydroelectric plant resulted from Tekhnopromexport’s victory in an open tender issued by Afghanistan’s Ministry of Energy and Water Resources. Power lines to transmit electricity from Tajikistan are also being built.
Afghan officials lament the fact that international donors do not fulfill their obligations, and they say their aid is ineffective. Given the ongoing political and military tensions in the country, its investment climate cannot yet be called favorable. According to the Afghanistan Investment Support Agency, of the $1.4 billion in contracts recorded last year, only $0.8 billion were actually invested.
The foreign private investment share in the Afghan economy is currently below 30% of total private investments due to the instability of the domestic political situation, red tape, corrupt officials and high tariffs and duties. In addition, the regulatory and legal framework governing investments in Afghanistan remains weak, and there is no proper mechanism to ensure the safety of private capital.
We should take note of the following points:
– Investment activity by donor countries does not ensure that they will fulfill their obligations;
– The investment structure makes it impossible to concentrate on addressing Afghanistan’s economic recovery because more than half of the pledged investments go to support the coalition forces;
– More than half of the investments intended to rebuild the economy are in the form of technical assistance (that is, they remain in the donor countries to pay for work done by experts and consultants, and for other technical assistance—advice, paperwork, etc.);
– Investments are spread across a chain of intermediate NPOs and international organizations, leaving no more than 15-20% of the initial amount for actual investment in the economy.
Therefore, the investment activity of donor countries is largely declarative in nature, so we should not expect to see Afghanistan’s economy recover quickly. Amidst the ruins, of course, rebuilding a few central highways and two or three power stations and bringing a degree of civility to the capital yield fairly high rates of growth. But there has been and still is no systematic approach to addressing economic issues. In other words, Afghanistan is assured of being totally dependent economically, having a low standard of living and therefore remaining the global center of instability, drug trafficking and terrorism for many years to come.
The impact of opium poppies
The illegal opium market is one sector of agriculture that is profitable. Opium revenues exceed all other forms of income in the country’s economy. In 2007, the area under opium poppy cultivation was about 193 thousand hectares, and the size of the harvest was 8.2 million tonnes. Opium and drugs derived from it comprise about half of Afghanistan’s actual exports.
Comparatively speaking, the ban on drug trafficking is only effective in the northern and northwestern provinces: it has developed virtually without interference in the rural areas of the southern and eastern parts of the country. The practice of giving loans against a future harvest and buying raw opium is widespread. It is worth noting, however, that contrary to popular stereotypes, opium production is not a vital element in the economy of the Afghan countryside, although this segment of the economy simply cannot be ignored. For the present (as cynical as it may sound), consideration can and should be given to legalizing funds derived from drug production, but with clearly defined procedures for amnestying the money and directing it into legal sectors of the economy.
That gives rise to an important question: how realistic is it to combat drug production in Afghanistan? It is well known that the main effect of the US counterterrorism campaign has been the resurgence of extremist and terrorist groups, a many-fold increase in drug production, illegal immigration, arms trafficking and other security threats not just to Afghanistan but to other Eurasian countries as well. That is because both drug production and the promotion of extremism and terrorism are now instruments of international politics. The Caspian Sea region, Central Asia and South Asia today have become a battleground for energy resources where the means justify the ends. Drugs are a weapon, a powerful factor contributing to the growth of corruption and the criminalization of society in general. They are undermining defense capabilities and the gene pool as a whole, and they strain the economy and the financial sector.
Everyone heads his own ministry
Perhaps the only proper direction for the development of Afghanistan’s economic system would be a planned and deliberate policy of developing its export-oriented industries and substituting imports with products that can be manufactured in the country and for which they have the needed raw-material base. That can only be done if there is a well-defined set of state economic policies in place—a concept for the controlled openness of Afghanistan’s national economy in the following areas:
– Improvement of tax policy;
– Creation of highly favorable conditions for encouraging import substitution and cultivating domestic producers of consumer goods (food and nonfood items);
– Improvement of business conditions;
– Restructuring of the national economic system.
Afghanistan’s government also needs to revise its tax policy, especially tariffs on imports, because that is the most effective mechanism for influencing development of the national economy without compromising its competitiveness. The main drawback of Afghanistan’s tariff system is its emphasis on fiscal functions rather than protection. Clearly, given the lax discipline in the payment of domestic taxes, import duties are the most reliable source of revenues for replenishing the treasury. In many regions, however, economic and other social relations continue to be regulated less by government legislation then by adat—local traditions and customs—and by major property owners, who usually are tribal leaders.
Economic interactions between the central government and local authorities are exemplified by the following: the total amount of taxes that can be collected in Afghanistan today is estimated to be about $500 million, of which only about $80 million make their way into the government’s budget.
Obtaining the support of local traditional leaders, including religious leaders, is a top priority for implementing any economic initiatives. Relations with the central (Kabul) government or ministries are more official.
Alexander Knyazev is a Doctor of Historical Sciences, Professor at the Kyrgyz-Russian Slavic University and member of the Russian Geographical Society.
Source: New Eastern Outlook