The Afghan Government is largely preoccupied with the country's security situation. However, it cannot afford to neglect the economy, of which the private sector is a fundamental part. In its current state, the Afghan private sector is not the engine of economic growth or instrument of social inclusion it has the potential to be. The Afghan Government will have to immediately step up to create a more conducive business climate. If the private sector were to remain in its current form, the effects could damage perceived government legitimacy and possibly even further destabilize the country. How, then, should the Afghan Government, the international community and other stakeholders proceed?
Afghanistan’s private sector is today a complex synthesis of informal, formal, reconstruction, war-related and illicit activities. Lines between these elements are not always distinct, and private sector opportunities and opportunism continue to fuel and be fuelled by conflict.
The formal Afghan private sector contributes a mere 10–12 per cent to the country’s official gross domestic product. Most of this is generated by a handful of large businesses. Micro, small and medium-sized companies are struggling to compete. Popular dissatisfaction with unequal access to economic resources, flawed public services and goods, the adverse security situation, and predatory government activity undermines an effective and sustainable private sector.
A free Afghan market?
Unfortunately, the international community’s intervention in Afghanistan in 2001 did not lead to a break from past economic processes, patterns or players. Indeed, although Afghanistan has received substantial amounts of aid intended to bolster state-building efforts, the sudden introduction of a market economy to a country beset by ongoing conflict has, in some cases, exacerbated existing problems. The aid economy created new revenue channels for existing, and newly emerging, oligopolies. Moreover, neither donors nor government have been sufficiently focused on accelerating growth in agriculture, the extractive industry, and trade and transit, which are cornerstones for long-term structural economic stability for Afghanistan.
A free market is, ideally, characterized by equality of access by all to economic resources and opportunities, and a rule-based playing field that permits and encourages competition. While completely free markets do not exist, Afghanistan finds itself at the other end of the spectrum: its market is ‘inaccessible’.
All these factors affect the production capability and competitiveness of micro and small enterprises, which employ the majority of Afghans. Limited employment opportunities, in turn, increase the attraction of illicit activities or the likelihood of radicalization: young men are at the highest risk. Private sector constraints also erode the legitimacy of the National Unity Government (NUG), thereby jeopardizing political stability and thus the country’s security situation.
A discouraging business climate for the majority
Efforts by the state and international actors to foster inclusive economic growth have so far been limited. Large family-owned business conglomerates with political ties have disproportionately reaped profits in the growth process, while for the vast majority of Afghans economic conditions have not improved. Unpredictability, a weak regulatory system and physical insecurity dampen both domestic and foreign investment.
Opportunities for the Afghan economy to connect with neighbouring and world markets are complicated by its landlocked position in a politicized and often toxic regional economic environment. The culmination of these forces and conditions, compounded by the convergence of the political, security and economic transition has created a precarious business climate. Extra-market conditions, which include doubts about the longevity of the NUG, rampant corruption, the distorting influence of foreign aid, and a dismal regional politico-economic environment, further erode business confidence.
In addition, Afghanistan’s fragile fiscal regime leads to a lack of public services and goods, and prevents the government from establishing an attractive climate for investment. This in turn deprives the government from (growing) fiscal revenue that could be ploughed back into providing essential public services and goods. This deadlock needs to be broken.
Ways forward
To break the deadlock the NUG should:
1. Display leadership and vision by promptly developing a realistic private sector growth strategy with clear and measurable milestones, division of labour between international and national actors, and the implementation of follow-up and monitoring processes;
2. Increase the capacity of key state economic institutions that support the productive potential of the private sector;
3. Take immediate carefully tailored measures to curb corruption starting from the highest government echelons. For example, corruption in administrative interactions with the private sector could be curbed through increased use of digitalized processes;
4. Improve the business climate in close coordination with the organized business community by pursuing growth-promoting economic policies—such as tax relief, state supply contracts and pivotal public-private partnerships—that support strategic business sectors;
5. Evaluate and update the strategy for trade policy instruments to promote sustainable development of prioritized sectors, primarily agriculture, agricultural processing and light manufacturing;
6. Tackle the hurdles that limit access to economic resources and mobilize state landholdings for use by the private sector through favourable long-term lease agreements. Specific sector-oriented banks that provide demand-led financial products are also recommended;
7. Invest in the country’s critical infrastructure, without which it will be impossible for the Afghan private sector to take off; and
8. Prioritize women’s full and equal participation in the economy by embedding initiatives to economically empower women in all economic development plans.
Where does the international community fit in?
Considering the still weak administrative, financial and technical capacity of the NUG, international community private sector development (PSD) support is much needed. Despite the obvious benevolent intentions behind PSD work in Afghanistan to date, failures of coordination and implementation by the international community are well documented. A number of direct market interventions, for instance, have fed into corruption and patronage networks, distorted markets and reinforced dependency. PSD efforts have also had limited success due to fragmented and uncoordinated approaches, and lack of contextualized knowledge. Some of these miscalculations might have even worked to the detriment of government legitimacy and private sector development. Therefore, the international community is strongly urged to allocate most of its resources to support the NUG in implementing the eight recommendations above. As a means to assist beneficiaries more rapidly, carefully designed and administered direct market interventions could also be considered.
Richard Ghiasy(Netherlands, Afghanistan) is a Researcher with the SIPRI project on Afghanistan’s economic development and regional integration.
ABOUT THE AUTHOR(S)
Richard Ghiasy was an Associate Researcher in the SIPRI China and Global Security Programme.
The Afghan Government is largely preoccupied with the country's security situation. However, it cannot afford to neglect the economy, of which the private sector is a fundamental part. In its current state, the Afghan private sector is not the engine of economic growth or instrument of social inclusion it has the potential to be. The Afghan Government will have to immediately step up to create a more conducive business climate. If the private sector were to remain in its current form, the effects could damage perceived government legitimacy and possibly even further destabilize the country. How, then, should the Afghan Government, the international community and other stakeholders proceed?
Afghanistan’s private sector is today a complex synthesis of informal, formal, reconstruction, war-related and illicit activities. Lines between these elements are not always distinct, and private sector opportunities and opportunism continue to fuel and be fuelled by conflict.
The formal Afghan private sector contributes a mere 10–12 per cent to the country’s official gross domestic product. Most of this is generated by a handful of large businesses. Micro, small and medium-sized companies are struggling to compete. Popular dissatisfaction with unequal access to economic resources, flawed public services and goods, the adverse security situation, and predatory government activity undermines an effective and sustainable private sector.
A free Afghan market?
Unfortunately, the international community’s intervention in Afghanistan in 2001 did not lead to a break from past economic processes, patterns or players. Indeed, although Afghanistan has received substantial amounts of aid intended to bolster state-building efforts, the sudden introduction of a market economy to a country beset by ongoing conflict has, in some cases, exacerbated existing problems. The aid economy created new revenue channels for existing, and newly emerging, oligopolies. Moreover, neither donors nor government have been sufficiently focused on accelerating growth in agriculture, the extractive industry, and trade and transit, which are cornerstones for long-term structural economic stability for Afghanistan.
A free market is, ideally, characterized by equality of access by all to economic resources and opportunities, and a rule-based playing field that permits and encourages competition. While completely free markets do not exist, Afghanistan finds itself at the other end of the spectrum: its market is ‘inaccessible’.
All these factors affect the production capability and competitiveness of micro and small enterprises, which employ the majority of Afghans. Limited employment opportunities, in turn, increase the attraction of illicit activities or the likelihood of radicalization: young men are at the highest risk. Private sector constraints also erode the legitimacy of the National Unity Government (NUG), thereby jeopardizing political stability and thus the country’s security situation.
A discouraging business climate for the majority
Efforts by the state and international actors to foster inclusive economic growth have so far been limited. Large family-owned business conglomerates with political ties have disproportionately reaped profits in the growth process, while for the vast majority of Afghans economic conditions have not improved. Unpredictability, a weak regulatory system and physical insecurity dampen both domestic and foreign investment.
Opportunities for the Afghan economy to connect with neighbouring and world markets are complicated by its landlocked position in a politicized and often toxic regional economic environment. The culmination of these forces and conditions, compounded by the convergence of the political, security and economic transition has created a precarious business climate. Extra-market conditions, which include doubts about the longevity of the NUG, rampant corruption, the distorting influence of foreign aid, and a dismal regional politico-economic environment, further erode business confidence.
In addition, Afghanistan’s fragile fiscal regime leads to a lack of public services and goods, and prevents the government from establishing an attractive climate for investment. This in turn deprives the government from (growing) fiscal revenue that could be ploughed back into providing essential public services and goods. This deadlock needs to be broken.
Ways forward
To break the deadlock the NUG should:
1. Display leadership and vision by promptly developing a realistic private sector growth strategy with clear and measurable milestones, division of labour between international and national actors, and the implementation of follow-up and monitoring processes;
2. Increase the capacity of key state economic institutions that support the productive potential of the private sector;
3. Take immediate carefully tailored measures to curb corruption starting from the highest government echelons. For example, corruption in administrative interactions with the private sector could be curbed through increased use of digitalized processes;
4. Improve the business climate in close coordination with the organized business community by pursuing growth-promoting economic policies—such as tax relief, state supply contracts and pivotal public-private partnerships—that support strategic business sectors;
5. Evaluate and update the strategy for trade policy instruments to promote sustainable development of prioritized sectors, primarily agriculture, agricultural processing and light manufacturing;
6. Tackle the hurdles that limit access to economic resources and mobilize state landholdings for use by the private sector through favourable long-term lease agreements. Specific sector-oriented banks that provide demand-led financial products are also recommended;
7. Invest in the country’s critical infrastructure, without which it will be impossible for the Afghan private sector to take off; and
8. Prioritize women’s full and equal participation in the economy by embedding initiatives to economically empower women in all economic development plans.
Where does the international community fit in?
Considering the still weak administrative, financial and technical capacity of the NUG, international community private sector development (PSD) support is much needed. Despite the obvious benevolent intentions behind PSD work in Afghanistan to date, failures of coordination and implementation by the international community are well documented. A number of direct market interventions, for instance, have fed into corruption and patronage networks, distorted markets and reinforced dependency. PSD efforts have also had limited success due to fragmented and uncoordinated approaches, and lack of contextualized knowledge. Some of these miscalculations might have even worked to the detriment of government legitimacy and private sector development. Therefore, the international community is strongly urged to allocate most of its resources to support the NUG in implementing the eight recommendations above. As a means to assist beneficiaries more rapidly, carefully designed and administered direct market interventions could also be considered.
Richard Ghiasy (Netherlands, Afghanistan) is a Researcher with the SIPRI project on Afghanistan’s economic development and regional integration.
ABOUT THE AUTHOR(S)