People's Democracy

Afghanistan: Burdened By US Interventionism

C P Chandrasekhar

WITH the world’s attention focused on the humanitarian and political disaster resulting from the US misadventure in Iraq, lessons from the experience with US-led restoration of “normalcy” in Afghanistan have been ignored. On December 22, 2001, following the defeat of the Taliban by a coalition of US and Northern Alliance forces, an interim administration under Hamid Karzai mandated from above by the Bonn peace agreement took charge of Afghanistan. Being a relatively small, landlocked and poor country that had been experiencing civil strife, with different degrees of external involvement, for more than two decades starting 1979, Afghanistan’s economy at the time of formation of the interim administration was both backward and disintegrated.

UNDERDEVELOPMENT AND POVERTY

With 85 per cent of its population reportedly dependent on agriculture and 53 per cent of the GDP estimated as originating in the agricultural, livestock and forestry sectors, as compared with 28 per cent in light industry, 8 per cent in trade and 6 per cent in construction, the economy in 2002 was structurally in an early stage of modern development. Extremely rough estimates quoted by the Asian Development Bank suggest that in 2002, Afghanistan’s GDP amounted to $4.4 billion, which implied a GDP per capita of an abysmally low $170 per head.

Two factors have contributed to the high “aggregate poverty” indicated by a per capita income that is less than half of the international poverty norm of a dollar per day per head by 2001. The first is the war that led to the ouster of the Taliban. An earlier estimate, also quoted by the ADB, relating to 1989, placed Afghanistan’s GDP at a much higher $6.9 billion and its per capita income at around $300. Underlying the subsequent massive contraction of the economy was the war which devastated even the limited infrastructure of the country, triggered the exodus of more than 3 million refugees to Pakistan, Iran and elsewhere and displaced a large number of people within the country.

Secondly, nature had added to the woes of an already war ravaged economy, with a protracted drought that began in 1999 and lasted till 2001. Again according to estimates made by the international community, in this case the World Bank, crop production was halved and livestock herds substantially depleted, making the situation in 2002 as desperate as it was. Since the prolonged drought has given way to a monsoon-led recovery, the rough GDP estimates relating to 2002 may be exaggerating the poor state of the economy.

Though such exogenous factors may exaggerate the extent of Afghanistan’s backwardness, no one can deny that the reconstruction effort that faced the country and its people a year and a half ago was indeed massive. Since then much has changed. After the peace was declared at the end of 2001, a January 2002 Tokyo meeting of donors made an initial pledge of $4.5 billion of aid over a 30-month period. A large number of refugees have returned to their home country. And international institutions in the form of the UN, the IMF, the World Bank and NGOs have channelled funds and personnel into the country and established base in the capital city Kabul. Yet, today, the impression is one of inadequate and damaged development and little reconstruction in the year and a half since more than two decades of conflict came to an end.

PUZZLING FAILURE

The inadequacy of the reconstruction effort is puzzling because the limited and scattered information on aid flows does suggest that inflows have been significant even if not massive. Aid flows take many forms. They occur directly to the government, through the World Bank administered Afghan Reconstruction Trust Fund, the Law and Order Trust Fund (LOTF, which funds the police), the Afghanistan Trust Fund (that pays for the army) and a number of other channels. They occur through routes indirectly linked to the government, inasmuch as local and international NGOs are supported by donors to undertake projects that are in keeping with the National Development Framework adopted by the government in consultation with the donor community. And they flow in completely outside the governmental framework inasmuch as US “coalition forces”, other than the International Security Assistance Force (ISAF), and international NGOs bring in their own funds and those provided by donors abroad for activities that are not necessarily reported in full.

FINANCIAL ASSISTANCE

The most easily accessed information is that on sums contributed to directly to the government. To coordinate these flows, donors constituted the Afghanistan Reconstruction Trust Fund (ARTF) which is administered (for a fee) by the World Bank. In principle, the mandate of the ARTF is extremely wide. But is main role is to fund the government’s recurrent expenditure including its salary bill, which though anathema in the Bank’s perspective is a source of substantial leverage over a resource-starved state. The process of using the World Bank to enforce conditionality appears to work through a mechanism in which the Bank controls funding for the crucial and politically sensitive recurrent budget and thereby is able to influence both the government’s policies and its utilisation of the remaining aid provided directly to the government.

The evidence collated by the Afghanistan Assistance Coordination Authority (AACA) suggests that aid to the government through various channels would by the end of FY 2003 amount to $ 3.36 billion. Thus over a period spreading over 26 months after the Tokyo meeting in January 2002, grants disbursed to the government would cover 87 per cent of the pledges made for a 30 month period after the meeting and 75 per cent of the total pledges made at and after the Tokyo meeting. According to AACA sources, it is this high rate of disbursement that has made the Karzai administration bid for a $15-20 billion aid package over a five-year period.

Though information on the flows through channels not directed at the budget and monitored by the AACA is as yet difficult to come by, the actual disbursement of aid is likely to have been substantially more than reported above. Even though a variety of sources in Kabul believe that the sums involved would not as large as that provided to the budget, it is likely that such flows would significantly add to the total. Thus clearly, overall disbursements have been in keeping with the expectations generated at Tokyo.

INEFFECTIVE AID FLOWS

What then accounts for the picture of a slow and clearly inadequate pace of reconstruction? There are two obvious reasons why aid flows have not worked to refurbish the infrastructure even in Kabul. To start with, as noted earlier, a large part of the flow that occurred prior to FY 2003 went to support the humanitarian assistance programme and took the form of food aid, which neither involved any capital spending nor involved expenditures in Afghanistan, since the food was imported. Second, a large part of the grant disbursement has gone to support the recurrent expenditures of the government, especially its wage and salary bill, which while spurring domestic consumption spending, has not contributed to savings and investment.

This use of aid to support the recurrent expenditures of the state, including its wage bill, has a number of implications. The inability of the government to finance its own recurrent expenditures reflects the fact that government in Kabul does not as yet have the legitimacy or the power to garner a large enough share of revenues which are reportedly being collected at the provincial level. It must be noted that, local revenue in Afghanistan comes from its taxes on trade, much of which occurs by land across it borders with Pakistan (2,450 km), Tajikistan (1,206 km), Iran (936 km), Turkmenistan (744 km), Uzbekistan (137 km) and China (76 km). A major problem being faced by the government in Kabul is to get provincial governors (still referred to as warlords by many) to part with a reasonable share of the revenue thus garnered. Even though a meeting in May saw 12 governors signing an agreement to do so and one of them delivered $20 million immediately thereafter, it is unclear how much of the revenue will finally accrue to the central government. Thus, expenditure is likely to be substantially driven by aid disbursements for some time to come.

MAJOR IMPLICATIONS

Such donor dependence has major implications. A very large proportion of the government’s 240,000 non-military personnel are located in Kabul. This creates a context in which in a direct sense the government in Kabul is supported by the donor community, whose leverage is therefore substantial. Simultaneously, the expatiate presence and spending in Kabul has generated a services and construction boom there, which is bound to widen differentials between Kabul and the rest of the country. In a country riven with ethnic and other divisions, this distancing of Kabul and its identification with a foreign presence could further undermine the legitimacy of the Kabul government, making it difficult for it to garner the revenues it needs to do away with dependence on aid. A consequence is that cycle of dependence of the government on aid would only be strengthened.

The second set of reasons why aid is not having the expected impact is related to allocation decisions. Budgetary allocations for SY 1382 (FY 2003) indicate that while social sectors like education, health and refugee rehabilitation are allocated a total of $775 million and another $210 million is to be spent on foreign investment promotion, technical assistance and capacity-building in the areas of Trade and Investment, Public Administration and Economic Management and Justice, only $509 million are allocated to the crucial areas of Transport and Energy, Mining and Telecommunications. When seen in terms of aid commitments to finance these expenditures as of June 2003, this bias appears even greater. Thus part of the reason for slow reconstruction of infrastructure is that a small part of even the development budget is being allocated for the purpose.

This overemphasis on technical assistance and capacity building is justified in the name of reconstituting the damaged Afghan state. Much of the money under these heads goes to institutions like the Adam Smith Institute and expatriate professionals who are paid huge consultancy fees in foreign currency, not all of which is even spent in Afghanistan. A constant refrain heard among the expatriate population in Kabul is that Afghans lack the capacity to manage their own affairs. Despite the fact that these institutions and most NGOs manage their programmes, especially those outside Kabul, with the aid of local partners, and though many skilled personnel who left as refugees to Pakistan, Iran and elsewhere have returned, this perspective overwhelmingly influences the management of aid-financed programmes. It almost appears that the “lack of capacity” discourse supports a nexus of aid-financed professionals, who find in such arguments the justification of their own dollar-funded presence in the country, and of aid donors, especially agencies such as the World Bank, who can use those arguments to prevent the entry of those more nationalistic in orientation into the decision-making and implementation process. This is not a fact that goes unnoticed among the Afghan population. Interviews with Afghan professionals inevitably generate comments to the effect that Afghan talent, more attuned to the socio-cultural and economic context of the country, is being ignored, while expatriate and non-resident Afghan “experts” are imported even when not required.

INFLUENCE OF AID CONDITIONALITY

The still-evolving policy framework in Afghanistan provides reasons why nationalistic perceptions may be considered dispensable. It is to be expected that with government expenditure substantially driven by aid disbursements, explicit and implicit aid conditionality is bound to influence the policy framework. The effort, therefore, is to ensure that those manning the government “own” the policies that such conditionality implies. Unfortunately that policy framework is not of a kind that could support the creation of a “domestic economic space” within which the Afghan state can fashion a nationally beneficial and egalitarian development strategy. Though the government’s donor-driven strategy is yet in the making, it is clear that the inevitable import dependence of a war-devastated economy is being intensified, by encouraging an open trade policy that would discourage domestic industrial investment. Crucial social sector areas like health provision are being handed over to private entities and NGOs to run at a price, which though currently subsidized by aid, could easily be charged to the user at a later date.

The state has adopted as law the principle that the central bank cannot lend to the government. Thus deficit-financed expenditure to revive the economy is ruled out, resulting in a near-complete dependence on aid for budgetary finance. The battered publicly-owned financial sector, rather than being supported and strengthened, in order to be leveraged for domestic industrial financing, is soon to be subjected to competition from private, especially foreign, players. Since the need for a banking system that can mobilize local savings and channelize it to priority investments crucial to domestic private sector development is great, this shift can be disastrous. Foreign banks would only wean away the most lucrative (mainly expatriate) businesses from the local, publicly owned banking sector, while refusing to take any responsibility for development. Finally, though the new Afghani is formally the national currency, aid flows and the expatriate presence is dollarising the economy with the dollar being traded on the streets and many service establishments quoting dollar prices and expecting payment in dollars.

These developments proceed unchallenged partly because a vocal, urban domestic elite is being incorporated into the aid economy. Not only are salaries paid on time with the help of aid, but the demand for services from the expatriate population is on the rise. Rents quoted in dollars are rising fast because of the expatriate rush into Kabul and some other cities. These and other opportunities are resulting in the emergence of a new class of richer Afghans, living off the aid economy, which is happy with the freedom that an open, dollarised economy provides.

UNSUSTAINABLE MODEL OF DEVELOPMENT

All this is fine at the moment since aid flows are leading to foreign exchange reserve accumulation with the central bank, which can use those reserves when required to prop up the new Afghani and prevent local prices of imported commodities from rising. But in the medium term, aid, import-dependence and dollarisation can all prove a burden. If the pace of aid inflow slows, not only will the just-reviving economy contract but the Afghani would depreciate pushing up the prices of essentials in that segment of the economy still earning and living off the local currency. Stagflation, in an already depressed economy, would be the result. On the other hand, if aid inflows continue at present levels or rise in volume, inequalities between Kabul and the rest of the country, across differentially endowed regions and between income classes are bound to increase. That can have dangerous implications in a country that is still scarred by a complex chain of civil strife influenced by ethnic and religious divides.

The current model of development in Afghanistan is clearly unsustainable for any discerning observer. But for those present in the country with short-term military and economic interests in mind, who are protected by the façade of altruism that a small dose of aid to a poor and devastated nation helps provide, this appears to be of no concern.