Essay: Consequences of implementing a market economy in Afghanistan

Ahmad Tariq Momeni

Abstract: This essay explores the consequences of implementing a market economy in Afghanistan, from its modern origins in the Afghan Constitution of 2004 to the impacts of joining the World Trade Organization in 2015. Without infrastructure, human capital, and industry, Afghanistan was not ready to adopt a market economy, and its establishment resulted in urbanization, the decline of its traditional agriculture sector, and rising poverty rates. The “market access to goods and services” provision of the WTO agreement in particular hurt domestic farmers. While the international development community has facilitated the transition to the market economy, it has also captured much of the investment and made the county dependent on its support. In response to these consequences, Afghanistan should join regional trade agreements and be more critical of foreign economic intervention.

 Keywords: International development, Afghanistan, market economy

I. Background: International development in Afghanistan

After the fall of the Taliban in 2001, the North Atlantic Treaty Organization (NATO) forces led by the U.S. remained behind to assist the governance transition process. With the help of the international community, Afghans experienced an interim administration, a transitional government, and finally a presidential government. Supported by a foreign military presence, Afghanistan opened its doors to international non-governmental organizations (NGOs) including the United Nations (U.N.), the World Bank, and the International Monetary Fund (IMF). They aimed to establish institutions, infrastructure, and bring positive changes in the socio-economic status of the Afghan nation; however, Afghanistan was not ready for these changes, which included the establishment of a market economy.

Afghanistan adopted a market economy after formally enshrining it in the Afghan Constitution of 2004. Article 10, Chapter 1 states: “The state shall encourage, protect as well as ensure the safety of capital investment and private enterprises in accordance with the provisions of the law and market economy.” Pressure by international organizations, including the World Bank and IMF, coupled with pressure from other bilateral donors remained crucial to the privatization and liberalization of the Afghan market.

Moving forward, specific ministries and institutions such as the Afghan Ministry of Economy, Ministry of Commerce and Industries, and the Ministry of Finance worked closely with international experts and advisors in economic development and growth. In 2003, the international community helped to establish the Afghanistan Investment Supporting Agency (AISA). In the meantime, the Afghan Parliament passed the Chamber Law of 2009 which recognized the Afghanistan Chambers of Commerce and Industries as an independent and democratic organization that functions as the voice of the private sector in the country. The policies of the above ministries and institutions were tailor-made in favor of the market economy, but, in spite of all these changes, Afghanistan’s economy remains unstable.

II. Was Afghanistan ready to adopt a market economy?

The advent of a market economy in Afghanistan came too early and without the right protections. While recent reconstruction efforts have helped, decades of war have destroyed Afghanistan’s infrastructure, forced residents to emigrate, and slowed the economy. The education system, while improving, does not guarantee good jobs for graduates. Similarly, Afghan industries are in need of further development. Without infrastructure, human capital, and industry, Afghanistan was not ready to adopt a market economy. Yet, this choice was imposed on the country in a constitutional loya jigra (grand council) organized by the international community.

Wars have destroyed even the basic infrastructure that the Soviet Union left in the country such as power plants, dams, highways, transportation system, and a strong military. Millions of Afghans immigrated to Iran, Pakistan, Europe, the U.S., and other parts of the world (Khan, 2012). When the Taliban came into power, they inherited no infrastructure, nor did they encourage the development of institutions and infrastructure. The Afghan economy of the Taliban era heavily relied on opium production and export, traditional agriculture, manual extraction of mines, and export of minerals to their close ally, Pakistan (Nijssen, 2010). For decades, Afghanistan had a traditional economy which still remains in place.

The Bonn Conference in 2001 was the first step toward state- and institution-building (Fields & Ahmed, 2011). Afghanistan, with the support of international community, established a gender-sensitive and multi-ethnic interim government and drafted Afghanistan’s constitution. To improve security, extend the authority of the Afghan central government, and to facilitate reconstruction, the international community (led by the U.S.) established Provincial Reconstruction Teams (PRTs) (McNerney, 2005). Additionally, basic infrastructure such as building schools, hospitals, civil administration offices, and roads were reconstructed to trigger economic growth.

One of the key institutions that leads nations to development and economic growth is a functional educational system (Ozturk, 2001), but Afghanistan still lacks this institution. Education is key to a society’s development, and investing in education involves investing in economic, social, and cultural aspects of a society, which in turn leads nations to progress. Afghanistan, as a developing country, in cooperation with the international community, has invested tremendous resources to develop an education system based on minimum international standards over the last 15 years. However, the whole system continues to lag behind.

While Afghanistan has improved in terms of the quantity of education offered, it has not improved much in terms of quality. The number of constructed school and university buildings and enrollment have increased, but the quality of education and higher education has not improved. As an Afghan student and former university lecturer, I personally experienced the outdated curriculum produced by this system, where students commonly copy and paste essays from the Internet. Even after 12 years of education, school pupils are often undecided about what to study in college because school curricula in Afghanistan are general and do not prepare students for the needs of the workforce. In the case of university students, thousands graduate every year from Afghanistan’s public and private universities with only a limited number of graduates obtaining employment (Afghanistan Times, 2019).

Education quality remains an urgent national development concern for Afghanistan (WES, 2016). Education with a very limited prospect of employment simply does not bring socio-economic development. It is true that education has improved in Afghanistan, but the outcomes are disappointing: Afghanistan has over 1 million unemployed educated residents (Afghanistan Times, 2019). Additional progress is needed, as education is one of the prerequisites of a market economy (Patrinos, 2016); education creates several key market factors: human capital, human created capital and technology (Natter, 2018).

The international community has not yet sought economic development through investment in key sectors and mobilization of available resources. One promising strategy would be to identify the needs and potentials of each province in the country; accordingly, the international community could invest and support investments. An example would be energy, as it is considered the basis of industrialization. Over the last 17 years, much infrastructure has been built to import electricity from the neighboring countries such as Iran, Turkmenistan, Uzbekistan, and Tajikistan, or to produce electricity through generators. Currently, 73 percent of Afghan power supply is imported—22 percent from Iran, 4 percent from Tajikistan, 17 percent from Turkmenistan, and 57 percent from Uzbekistan (ADB, 2017). However, the imported power is inefficient, unstable, and, subsequently, unreliable, and costly. The money invested in importing energy could be invested in producing domestic energy since Afghanistan is rich in renewable energy resources, such as solar, wind, biomass, and flowing water (Fahimi and Upham, 2018).

Afghan policy makers should have had a say in drafting policies for Afghanistan because context always matters. Unhappily, Afghan leaders and policymakers accepted the market economy approach without understanding its key tenets nor its positive and negative implications. Some may argue that Afghans were not truly free to choose. That is true. However, Afghans could at least have negotiated with international experts and institutions, as Afghans know the context and the status quo of their country the best. They could have asked for a transition phase, then they could have evaluated the transitional period to measure its effectiveness and implications. Most developed countries don’t even have a full market economy, as their government intervenes to protect industries when necessary. In contrast, when it comes to developing countries with a market economy, government intervention is often deemed dysfunctional.

It was too early for a newly established government like Afghanistan to adopt a specific type of economy. A market economy requires political, economic, and social institutions to be in place, because these institutions can induce political, economic, and social stability which ultimately result in economic development and growth. Institution-building cannot happen overnight, particularly in war-torn countries like Afghanistan. It requires capital: human capital and human-created capital. Sudden imposition of the market economy without meeting the prerequisites was a mistake. It is true that Afghanistan enjoys a surplus of unskilled labor, but it lacks factors of market such as capital, skilled labor, and technology.

How can a traditional economy turn into a market economy overnight without market factors in place? Prior to any decision, the international community should have put the infrastructure in place for this type of market to have a chance of being successful, as developed countries have implemented and introduced the market economy and know its best practices. For war-torn countries like Afghanistan that have no infrastructure in place, contextual needs assessments and research are essential prior to adopting and implementing any internationally accepted policy.

III. Aftermath of the market economy in Afghanistan

Afghans were very hopeful with the arrival of the international community in the country. They envisioned development in key sectors like agriculture, livestock, mining, energy, and production. They were optimistic and dreamed of economic miracles like a high rate of employment for skilled and unskilled laborers in the production sector and self-sufficiency in production of food products such as wheat, flour, fruits, and vegetables. Yet, years later, the poverty rates in Afghanistan remain the same, or even worse. In particular, Afghanistan’s traditional agricultural sector was undermined as the local development community increased demand for cheap foreign goods and incentivized farmworkers to move to cities and/or enter the service sector.

At the beginning of the reforms, 77 percent of Afghans felt that their country was headed in the right direction, compared with 30 percent in the vastly better-off United States (Langer, 2005). Despite challenges, the public hoped that developed countries would help establish a strong government that would concentrate on economic development and job creation through prioritization that would invest in infrastructure and the education, agriculture, energy and mining sectors. The market economy was supposed to trigger economic growth and create employment opportunities through private investment while the “invisible hand” of the market would work and benefit Afghans (specifically, the poor majority), but market economy did not meet its purpose

Free market policies in Afghanistan after 2001 brought economic development and attracted foreign investment; however, the majority of people remained poor and destitute, while youth unemployment never dipped below 14 percent (The World Bank, 2017a). With the market economy, most of the domestic firms and state-run factories also stopped functioning due to lack of modern machinery to compete with foreign and private companies (AISA, 2003). Unfortunately, the economic development was unsustainably donor-driven and did not deliver adequate employment and reduction in poverty. After 17 years of the presence of the international community, the socio-economic status of Afghans is dismal. Billions of U.S. dollars were spent in several sectors without any remarkable change in the socio-economic status of the poor Afghans (SCA, 2018).

It is not a surprise at all that the poverty rate has increased since 2007 (World Bank, 2018). From 2001 to present, Afghanistan heavily relied on international aid, and poverty has increased since the start of the withdrawal of international forces in 2011, causing a corresponding decline in economic growth. This comes while the share of population below the national poverty line is 39.1 percent in 2014 (ADB, 2017), with the poverty line being only earning $1.25 income per day (The World Bank, 2017b).

In the transition to a market economy, the agriculture sector has been severely neglected, although it is central to Afghanistan’s economy, employing 62 percent of the nation’s workforce (The World Bank, 2017c). Given the high rate of employment in this sector, investment in agriculture equates to a higher employment rate, lower poverty rate, GDP growth, and lower trade deficit. Unfortunately, this issue has not been taken into account and the remaining Afghan farmers are still struggling to gain access to domestic and regional markets due to lack of technical support from the government and the international community. Most do not even have cold storage to preserve their fresh fruits and vegetables.

Cheap food imports from neighboring countries have added to agriculture problems. A remarkable number of Afghan farmers were discouraged to keep on farming, leaving their villages for a better life in the major cities of Afghanistan (HELP, 2014). As a result, foreign agricultural produce has taken ahold of the market. A friend’s shopping story explicitly narrates the depth of the disaster in Kabul, Afghanistan (Mehri, 2017):

Buyer:             How much is the onion, sir?

Vendor:           Which one?

Buyer:             What do you mean by ‘which one’? An onion is an onion!

Vendor:           My brother, it depends on the color. For example, one Seer (7 kg) of the red onion is 160 AFN, the white one is 185 AFN, and the yellow one is 150 AFN.

Buyer:             It is true that the colors are different, but why the different prices?

Vendor:           Why are you giving me a hard time by asking such questions, brother? The red one is Pakistani, the yellow one is Kyrgyzstani, and the white is Iranian.

He narrates, “I did my shopping . . . In my basket of goods, only orange and spring onions were from Afghanistan; the rest were imported agriculture products.” The map below shows where the groceries came from:

He ended his story with this question: “Is the Afghan Agriculture Ministry, with its million-dollar programs, only producing the limited crops of radish, oregano, coriander, and spring onions?”

While the availability of foreign aid created high demand for goods by the Afghan government, international NGOs, and international troops, Afghanistan had to meet this demand through imports, since it did not have the capacity to fulfill the demand domestically due to little investment in key sectors (Samim, 2016). Thus, Afghanistan opened its doors to foreign goods. Furthermore, the government took precious few measures to protect small businesses and the vulnerable farmers in the country. By relying on imported food instead of Afghan food, the quality of life deteriorated for farmers and small businesses (Ibid). The low tariffs on imported goods suppressed farmers inside the country, resulting in an economy ever-dependent on neighboring countries (Help, 2014).

In addition, the large amounts of foreign aid injected in the economy created jobs and demand for educated, skilled and unskilled labor for a short time (ATR Consulting, 2018). Therefore, it was a huge incentive for Afghan farmers to leave agriculture and rush to the service sector (Samim, 2016). Afghans established hundreds of construction, logistics (supply), and import companies across the country with the hope of getting a slice of the international aid pie. Thousands of employees and laborers were recruited (Ibid.). The table below shows the value-added by each sector to Afghanistan’s GDP.  

This provided a great opportunity for those in power or who had connections with the government, international troops, and nonprofits to make tens of millions of dollars. International aid even created a few Afghan millionaires (Chiaramonte, 2017; Safi, 2015). Under the free market, Afghan businessmen monopolized the market and misinterpreted market economy as saying, “sell at whatever price you wish.” These opportunists formed mafia groups in different fields (IWA, 2015; Tolonews, 2013). These millionaires even have investments in several countries such as UAE and Turkey (Green, 2012); in case of any incidents, they liquidate their capital and leave the country, easily finding residency or citizenship elsewhere.

Having witnessed that a lot of people found jobs in big cities and some even became even millionaires, a remarkable percentage of farmers left their lands and rushed to the city for the dream of a better life. A report by UNHABITAT suggests that Afghanistan is experiencing the most powerful wave of urbanization in its history (2019). Not surprisingly, the lack of work in rural areas and the perception of better opportunities in town were the major causes of migration (Ibid.).

International humanitarian organizations exacerbated the situation. The World Food Program – Afghanistan (WFP) is an example. Before December 2010, the WFP used to buy and import wheat from abroad to provide food assistance to Afghanistan's neediest families (IRIN, 2010). Not only was it too costly, but it greatly devalued the price of wheat. Therefore, it discouraged Afghan farmers from cultivating wheat in those years. In early 2010, the WFP food pipeline was disrupted when the food was lost to flood waters while in transit through Pakistan (WFP, 2010). This forced the WFP to find an alternate solution to cover its wheat shortages in winter (Ibid.). Therefore, WFP signed a contract to purchase wheat from Afghanistan’s Ministry of Agriculture, Irrigation and Livestock funded by the U.S. Agency for International Development, and another portion directly from small-scale farmers and farmers’ organizations through the pilot Purchase for Progress program (Ibid.).

While Afghans rushed to cities, there was no plan in place to accommodate the influx of migrants. Therefore, it was out of the control of the local government and, thus, created chaos in the major cities of the country. For example, in Herat, most of the low-income families residing in suburban slum areas suffer from poverty, unemployment, child labor, health and nutrition issues, air and water pollution, and lack of functioning public infrastructure to address these challenges (Bhalla, 2012). Even most of the buildings constructed in urban areas are far from any urbanization standards. An excess amount of money with the minority rich and some middle-income families led to construction of concrete buildings without any insulation and septic wells (Kammeier & Issa, 2017). It takes a lot of energy to heat and cool these buildings. For water, Afghans drilled deep wells both for drinking water and sewage (Ibid.). Drilling wells for both purposes in the major cities lowered underground water by one meter and significantly polluted potable water with sewage water (Ayoubi & Beheshta, 2017); for example, 70 percent of Kabul potable water is polluted (Ibid.).

Above all, the current economic status of the country is not promising. After 17 years, the annual budget of the Afghan government is not balanced and still depends on international aid and donors. The most disastrous part is Afghanistan’s trade deficit. According to the IMF Country Report (2017), Afghanistan’s total exports in 2017 amounted to $723 million while total imports were $7.1 billion. With a large trade deficit and woefully inadequate infrastructure in place for accelerating exports, Afghanistan cannot viably reduce its trade deficit. Devaluation of currency to increase exports is a possible solution, only if there is an available and functional infrastructure to do so. As a result, to cover the trade deficit, Afghanistan annually receives loans from the IMF and Asian Development Bank (ADB). The ADB alone lends Afghanistan almost $963.1 million, with additional committed grants totaling $3.4 billion (ADB, 2019). The question is how long the IMF, ADB, and other financial organizations will give loans to the Afghan government and how long international humanitarian aid will cover shortages of Afghanistan’s annual budget given the above challenges, political instability, and massive corruption in the country.

IV. Afghanistan’s membership in the WTO and its impact on the country’s economic growth

World Trade Organization membership, specifically the clause calling for “market access for goods and services,” further hampered the effects of market liberalization throughout the 2000s. Before joining the WTO in 2015, multinational corporations had access to markets in Afghanistan. In fact, they rushed to Afghanistan at the same time as the intervention of the international security forces. All of the logistics, construction, training, medical, and administration services of the military were contracted with private companies. Billions were spent on supplying the U.S. military in Afghanistan, and most of this ended up in the U.S. corporations’ accounts. For instance, a report by ACBAR, an alliance of international aid agencies working in the country, including Oxfam, Christian Aid, Islamic Relief and Save the Children, estimated that 40 percent of the aid money spent in Afghanistan has found its way back to rich donor countries through corporate profits, consultants' salaries, and other costs, significantly inflating the cost of projects (Norton-Taylor, 2008).

Most of the international aid for the reconstruction and rehabilitation of Afghanistan has been channeled through international nonprofits, the U.N., and private contractors. The Center for Public Integrity published a list of top contractors in Afghanistan and Iraq from 2004- 2006, which included foreign companies such as Tetra Tech, Chemonics International, and DynCorp International (Buzenberg, 2007).

International aid has been a great source of income for international contractors over the last 17 years. For example, an international staff in an American nonprofit is paid 22,000 USD monthly as a program officer with 6 months R&R (rest & relaxation), per diem, allowances, international trips, insurance, and many other benefits. A qualified and experienced Afghan in the same position receives 1,000-2,000 USD per month and must work 12 months without any other privileges (SIGAR, 2017). The Special Inspector General for Afghanistan Reconstruction’s (SIGAR) findings corroborate this claim and show how international aid was squandered over the last 17 years in contracts and construction (SIGAR, 2018).

WTO membership will benefit mostly developed countries. For instance, Afghanistan committed to reduce fixed taxes on imports. The “Market Access for Goods and Services” clause eliminates the 3 percent tax on imports (WTO, 2015). As mentioned earlier, Afghanistan is a net importer. Elimination of a fixed tax on imports not only helps the economy, but also accelerates the drowning of the mini-functioning firms in the country (Jawara & Kwa, 2004). Instead of helping the least developed countries boost up their economy through the protection of domestic production and firms by imposing higher tariffs on imports, the WTO advocates for the elimination of tariffs. It seems that similar institutions follow their agenda and universalize the rules that are benefiting developed countries.

In addition, Afghanistan has committed to not apply any anti-dumping, countervailing, or safeguard measures until it has implemented appropriate WTO-consistent laws (WTO, 2015). Yet, many developed countries such as the European Commission subsidize their agricultural products. One of the contributing factors to domestic production and growth is subsidizing the production in the agriculture sector in Afghanistan (Jawara and Kwa, 2004). Having no knowledge of the context, potentials, and circumstances of the least developed countries like Afghanistan, the international community imposes universal regulations through the IMF, U.N., World Bank, and the WTO. While these measures have worked for certain countries like Japan, it is naïve to think that what has worked for Japan — one of the biggest economies of the world — would also work for Afghanistan.

V. Moving forward and policy recommendations

As shown earlier, the market economy has deteriorated the domestic production sector of Afghanistan and created large unemployment and poverty rates. When Afghanistan joined the WTO in 2015, it accepted an even more advanced version of the market economy. The more Afghanistan joins such universal organizations, the more it loses control over its sovereignty; for any internal decision going forward, Afghanistan must make sure it is not in violation with other signed universal agreements. For instance, under WTO rules, international corporations can apply for any national project or RFP (request for proposals) announced by the Afghan government. Since the budget for such projects/ RFPs is paid by the international community, the Afghanistan government cannot prefer national corporations and suppliers over domestic ones. As a result, domestic companies either grow slowly or go bankrupt. Violations of any of these laws will have consequences, as Afghanistan relies on international aid and loans from the IMF and Asian Development Bank for its annual budget and trade deficit.

Since Afghanistan is already a WTO member, it should find a way to balance national priority programs with the WTO rules and regulations to support its domestic products, especially farmers and small businesses. Afghanistan can also identify and sign regional agreements with strategic allies specialized in certain sectors that benefit the country politically and economically. For instance, Afghanistan should join the Shanghai Cooperation Organization as Afghanistan did in signing the Central Asia Regional Economic Cooperation. Such regional cooperation can be advantageous, as the allies under the regional agreements can invest and contribute to key infrastructure. The government should also make sure that the domestic benefits of these agreements outweigh the disadvantages. In addition, under regional trade and cooperation agreements, the Afghanistan government should provide incentives for its strategic allies to invest in key infrastructures and Afghanistan national priority programs. Investment can take place in good governance, human capital (professional and vocational training), agriculture development, renewable energy, mining, and other key areas.