GMF - The German Marshall Fund of the United States - Strengthening Transatlantic Cooperation

The article was originally published in the World Politics Review.

Among countries that exemplify poorly managed economies, Afghanistan figures prominently. Many factors currently weigh down the Afghan economy, including negative current account balances, unrestrained government spending, low productivity, negligible income taxes, years of cheap and fraudulent lending and widespread graft. The prospects for the future are no more optimistic.

The impending international troop drawdown combined with inadequate security and looming uncertainty beyond 2014 have made the country a financial no-go zone for foreign investors. Afghanistan is beginning to suffer from the departure of the large sums of foreign capital and investment it has largely depended on for years. Reportedly, every year more money leaves the country than the Afghan government collects in customs duties and taxes combined. In the past few years alone, more than $4 billion -- drawn largely from U.S. and European aid projects, lucrative Western security and logistics contracts and illicit drugs -- has been moved out of the country to the Persian Gulf, Europe and the United States.

In the meantime, the Afghan economy is buoyed by foreign aid -- money from the U.S. and other countries that continue to support a government that is largely a financial black hole. Continuing along this track will have deleterious effects for Afghanistan’s economic future and is leaving the country at serious risk of collapse.

In Afghanistan, the extension of too much help has created moral hazard and disincentives for reform. Kabul’s dangerous complacency can be reined in by weeding out the underlying problem: reducing foreign aid and engaging Kabul in structural reforms, through a combination of reduced spending and new taxes on the wealthy Afghan upper class.

The problems with the Afghan economy, however, are not limited to insufficient security and dwindling capital. They also include the absence of an effective and robust team to efficiently spearhead development efforts. International assistance has meant that Afghan authorities have yet to take the country’s financial direction seriously, allowing many in power to put their personal and political interests ahead of the country’s bottom line. The Kabul Bank crisis, in which former executives were able to embezzle nearly $1 billion in off-the-books loans before being caught, epitomizes Kabul’s collective incompetence.

Predictably, this situation has had knock-on effects on the socio-economic well-being of the Afghan people, half of whom still live on $1 a day. There have been drastic changes in Afghan society, with continuing and widening socio-economic disparity and no sign of a sustainable middle class emerging. At present, with more than 60 percent of the population under the age of 25, unemployment hovers at 35 percent. The culture of corruption has grown drastically, affecting the daily life of most Afghans. Competition in the local economy is nonexistent in virtually all sectors, and the Afghan upper class has not only managed to make and launder money from lucrative Western contracts but has also shrewdly skirted taxes on a large scale. Despite President Hamid Karzai’s recent campaign to tackle the graft that has largely undermined his government’s legitimacy, no high-level corruption case has yet been prosecuted.

Such is the dreadful economic state of a country that has received nearly $60 billion in aid since 2002, plus an additional $16 billion recently pledged in Tokyo. No doubt large portions of those funds have been squandered. The weak political will of Afghan leaders, coupled with financial mismanagement, is preventing aid money from reaching those in need at a time when meager gains in education and health services could easily be lost.

However, Afghans are not solely responsible for the wastage of aid. In the past, the bulk of aid money has been channeled through private contractors, subcontractors and foreign NGOs rather than the Afghan government. Donor agencies have often function as parallel governments, feeding lavish salaries to their international staffers while overlooking the needs of the Afghans and steering Afghanistan-intended funds through various private contractors, at both the national and international levels.

The measures taken by the Afghan government and Western donors to remedy the situation have so far been insufficient. This harsh reality has drastic implications well beyond 2014, when foreign capital and assistance will recede, and should be a wake-up call for donors to avoid a “business as usual” approach.

The United States and Western donors understand that Afghanistan can only lessen its overreliance on aid if it develops its economy independently. The billions promised by foreign donors will keep the government afloat but will not promote economic growth. A long-term strategy to grow the real economy is both imperative and currently largely lacking. The United States should put its weight behind investing in Afghanistan’s productive sectors -- such as mining, agriculture and energy -- and focus on job creation and human development rather than blindly funneling more money into the country. The reservations voiced recently by certain Afghan cabinet members on the proposed mining law is significant for demanding more clarity and improvements to ensure the protection of Afghanistan’s national patrimony. With many hopes vested in the country’s mining industry eventually yielding large payoffs, Kabul must take its time with drafting the legislation to ensure it is comprehensive and ultimately effective.

Though mobilizing Afghanistan’s extractive industries to generate revenue is a seemingly difficult and lengthy process, made even more challenging by persistent insecurity, Afghanistan cannot rely on foreign money forever. Targeted foreign investment in Afghanistan’s productive sectors is desperately needed and will eventually pay off.

Javid Ahmad, a native of Kabul, is a program coordinator with the Asia Program of the German Marshall Fund of the United States in Washington, D.C. The views expressed here are his own.

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