NEW YORK – Afghanistan’s security and political situation remains plagued by uncertainty, stemming from the withdrawal of United States and NATO combat troops, the upcoming presidential election, and the stalled peace negotiations with the Taliban. Recognizing that continued economic insecurity will exacerbate this perilous situation, the government has announced a new package of economic incentives aimed at attracting foreign direct investment.
The package includes the provision of land to industrialists at dramatically reduced prices, tax exemptions of up to seven years for factory owners, and low-interest loans of up to ten years for farmers. Such incentives are targeted at foreign investors and the local elite, with the aim of stopping or even reversing capital flight. But the new measures ultimately amount to more of the same: a fragmented policy approach that will prove inadequate to solve Afghanistan’s fundamental economic problems.
In the early stages of the post-war transition, FDI increased rapidly, rising from 1.2% of GDP in 2002 to a peak of 4.3% of GDP in 2005. Most of these inflows were directed toward the construction and services sectors – the main drivers of GDP growth – and aimed to satisfy international demand, both civilian and military.
But, in 2006-2007, FDI levels began to fall, owing to a sharply deteriorating security situation, a continued lack of electricity and adequate infrastructure, a shortage of skilled labor, inadequate legal and regulatory systems, inefficient bureaucratic procedures, and the need to renew companies’ licenses annually. Land grabs, chronic corruption, impunity, the inability to enforce contracts, and the fragmentation and ineffectiveness of aid deterred foreign and domestic investment further. As a result, FDI collapsed to less than 0.5% of GDP annually in 2011-2012.
Moreover, in the effort to develop two of the world’s largest mines, investors’ greed prevailed over their security and business-climate concerns. In 2007, the Metallurgical Corporation of China won the concession for the Aynak copper deposit in Logar Province. In 2011, a group of Indian state and private companies won the concession for the Hajigak iron-ore deposit in Bamyan Province. But, despite these projects’ reported billion-dollar price tags and high expectations, the investments have catalyzed little progress, owing partly to security issues.
Worse, the mines’ displacement of residents, underpayment of workers, and environmental damage have generated resentment in local communities, which is likely to grow in the future. After all, the granting of mineral resources to foreigners reduces – and could even eliminate – their benefits for local people.
As it stands, Afghanistan’s economy is a house of cards. Aid levels are comparable to GDP, with donors covering roughly two-thirds of government expenditure and the entire current-account deficit, which amounts to 40% of GDP. But aid is falling and expected to drop sharply after 2014.
Rather than continuing to pursue piecemeal measures like those that it has just approved, the government needs to implement an integrated and targeted strategy for the reactivation of investment, employment, and trade. Indeed, a drastic shift in policy is essential to avoid economic collapse.
In order to reduce the risks associated with investing in Afghanistan, the government must create a system that benefits local communities and foreign investors alike. This can be achieved with a strategy based on two distinct but mutually beneficial “reconstruction zones”: an export-oriented zone (ERZ) and a local-production zone (LRZ).
The ERZ, focused exclusively on producing goods for export, would provide tax incentives, basic infrastructure and services, security, and a stable legal framework to investors. In exchange, investors would commit to train local workers, create employment by purchasing local inputs and services, improve corporate practices and local providers’ standards, facilitate technology transfers, and establish links with local technical schools and universities.
The LRZ would enable local people to improve their livelihoods though the production of agricultural goods, the efficient delivery of services, and light manufacturing. Such a scheme would also help to bolster gender equality by providing a level playing field for all Afghans in terms of security, social services, infrastructure, credit, and inputs (such as seeds, fertilizers, and agricultural machinery). Moreover, it would boost food supplies and reduce Afghanistan’s exorbitant dependence on imports.
By focusing exclusively on foreigners and domestic elites for investment, Afghanistan is missing out on the vast potential of micro-entrepreneurs and small businesses to contribute to steady GDP growth. Achieving long-overdue peace and stability will be impossible without them.
Copyright Project Syndicate.
Graciana del Castillo is the author of Rebuilding War-Torn States and the forthcoming Guilty Party: The International Community in Afghanistan.
For additional reading on this topic please see: