The Permanent Exit

Americans have declared their exit strategy. They have announced that their terms of engagement in Afghanistan have changed. Troop withdrawal after more than a decade of fighting has begun. Is the war over? or is more remaining to be fought? Will the lessons drawn from 1989 when Soviet troops withdrew be put to use or will history repeat itself sometimes soon after 2014? Does Afghanistan have an exit strategy of its own?

The fundamental issue, over which this war was begun, was the felt need of the West towards integration of Afghanistan with the world communities, through building adequate governance capacities towards prosperity by gradually marginalising those who fish in troubled waters. All this was singularly aimed at making the world a safer place, through containing divisive forces on the soils of blood soaked Afghanistan that threatened global security. There are other perceptions taking rounds though. Going by the available evidence, resource hunting in this alien land does not seem to be a plausible reason because the beneficiaries of major resource acquisition till now have been only the countries whose soldiers never laid foot here. Strategic control of this territory too appears to be a debatable subject in this age of sophisticated technology and shortening distances. This controversy of intentions behind reasons of aggression in Afghanistan is perhaps because too much was invested in the military style of winning the war gradually losing sight of the fundamental issue – integration through development.

Exiting out of Afghanistan for the international community is a lot easier as compared to that of the Government of Afghanistan. The country needs to have an “exit strategy” to come out of this dreadful war once and for all. Does Afghanistan have ONE? Or is it going to repeat its historical mistakes yet again? If we wish to come out of the mess we are in, the war needs to intensify though with a different approach and priorities. What should be the nature of this war? Who are the enemies hence forth?

The three enemies strengthening divisive forces traditionally have been and remain poverty, corruption and illiteracy though some would argue for continued political interferences. Looking carefully, these interferences are a consequence of the above factors and not the other way round. Unsurprisingly, Afghanistan is ranked by the UN on the Human Poverty Index, with a value of 59.8%, the 135^th among 135 countries for which the index has been calculated. It is 181^th among 182 countries on the Human Development Index. Afghans have an average life expectancy at birth of 48 years, and their adult illiteracy rate is around 72%. No wonder institutions failed to take roots, be it political, economic or judicial. The deeply divided population continues to look for meaning in its identity as it finds rosy solace in identifying itself with groups that promise quick ways of amelioration. This promotes an overemphasized sense of honour and a dangerously blown out of proportion sense of entitlement.

However, it would be wrong to assume that rebuilding efforts have completely gone down the drain. For reasons associated with nature of fragile states where institutions and systems are at basic formative stage, the donors designed and implemented their programs through their own methods and procedures. The Afghanistan government, one of the key stakeholders in such projects, could not participate effectively as it is very difficult to have demand driven projects in an insecure and volatile environment where social or community mobilization is hardly possible. The aid projects therefore assumed the nature of being donor driven and supply driven instead of being demand driven. Non-involvement of the Government in identifying and leading priority areas for development further resulted in uneven distribution and allocation, often leading to crowding of programs in few areas and absence in other areas. It is estimated that during the period from 2002 to 2011 US$ 57 billion was spent in Afghanistan. Of this 90 percent were spent on projects directly implemented by donors according to World Bank, Country Program Evaluation Report.

Things have changed gradually though. Afghanistan’s estimated per capita Gross Domestic Product of $591 in 1390 (2011) is five times higher than the $123 per capita GDP of 10 years ago. Access to primary health care has increased from 9% of the population to more than 57%. Nearly 8,000 kilometres of national highways, regional highways and provincial roads have been built. Civil aviation services have also improved considerably connecting Afghanistan to all major hubs in the region. Access to electricity has increased by 250% and the national power utility has grown into a more efficient, well-managed corporation.  The Information and Communications Technology (ICT) sector has grown from almost no coverage in 2001 to 86% of Afghan residential areas. The Agriculture Sector has seen irrigated land, increase from 1.2 to 1.8 million hectares; wheat production has grown from 1.5 to 3.2 million tons; and the total horticulture area has grown from 75,000 to 120,000 hectares, increasing grape production by 69 percent and almonds by 195 percent.

Afghanistan’s economy remains strong with around 10% average annual growth since 2002. However, no pat on the back yet, there are multiple issues that pose serious challenges to development that we have just noted. Apart from tackling insecurity and widespread corruption’ much needs to be done on building key institutions that can support the growth trajectory. Poverty and illiteracy can easily dry up the thin visible progress leading to much dreaded crisis and conflict.

To consolidate the gains, building confidence amongst locals, expats and foreign investors is the key. This can come provided there is confidence to do business on fair and equitable manner. Experience from the last 30 years has revealed that competition amongst businesses has been beneficial for less developed countries, as markets have opened up leading to more products and more jobs. Competition also brings in transparency and accountability in government-business relationship. Linkage between “competition” and “poverty reduction”- which is central to ills in Afghanistan, is rather simple to establish. Small producers if are considered as consumers of ‘inputs’ and ‘infrastructure services’ then any interventions by the  government in improving competition in these markets would help these producers and hence propel further growth. Thus, there are enormous possibilities for competition to address poverty by improving access to services and creating jobs. One of the definitions of poverty is the absence of an individual from a market because they simply can’t afford to operate in it. Thankfully, a number of countries, most notably South Africa and Senegal, are examples of how new entry in market encouraged by competition policy can help widen access and bring more poor consumers into markets. Learning from these experiences, it is time Afghanistan starts investing in building institutions that promote and protect “fair trade”, in markets that ensures fairplay.

Perhaps the biggest challenge in Afghanistan will be in finding ways to make this happen at the soonest. Here lies the “Permanent Exit Strategy” of Afghanistan that will restore it to its recently lost glory. This will allow the world to feel safer averting the unlearnt mistakes of 1989 and that which was airdropped after 9/11.

War to Wealth

Kabul 2012

How does a nation become wealthy? This question has been bothering Economists ever since Adam Smith wrote “Wealth of Nations”.  The debate continues and Public Policy analysts continue to struggle to arrive at a definite answer.

One simplistic yet potent answer though is: The Nation that allows each of its population to contribute and reap corresponding benefits out of its efforts, is for sure on the road to success towards wealth creation. It is easier said than done, as it requires an environment where every talent is nurtured and promoted and where every property right is protected.

According to World Bank report titled, “States and Markets, 2002”: “people rise from poverty when countries act on two pillars of development:  Building a good investment climate in which private entrepreneurs will invest, generate jobs, and produce efficiently, and Empowering poor people and investing in them so that they can participate in economic growth”.  The role of institutions and their efficiency thus is the critical factor.

Strength of institution is dependent upon enviable Political will, handled with immense political maturity. In this context, the Afghanistan Constitution makers have set the road map for economic development. Article 10 provides for market economy and Article 11 says that suitable policies and mechanism be developed towards facilitating creation of a sound economic environment.

What did the Fathers of Constitution mean when they wished a market economy?

Well for sure, a level field for markets to compete for profits. And economic theories say that in the process of competing freely, the resource allocation is efficient benefiting the consumers in having lower price, better quality and even better service. Ideally this would happen if the market place is dominated by hardworking, innovative people. But blame it on human nature, tendency is to take shortcuts. Instead of competing fairly, it can often pay to take the so called smart route, through anti competitive practices such as forming cartels to fix prices for earning those extra wealth in the shortest possible time. Take the case of early 2008. Afghanistan’s main food and energy imports were hit simultaneously by dramatic price increases in international markets. Domestic prices of these products rose substantially, resulting in significant hardships suffered by households. The Government of Afghanistan was found wanting at policy instruments and institutional mechanisms to tackle this unusually severe situation, a situation made worse by the subsequent global financial crisis. Popular perceptions attributed the multiple crises to chronic market deficiencies and in particular to the presence of cartel-like behaviour by a few groups controlling trade and distribution of food and energy products. These perceptions have not been verified, yet the case makes a good ground for the necessity of institutions regulating market behavior and fair competition, to avert such situations in future or lessening its impact wherever possible.

In Afghanistan, where poverty is affecting a large portion of the population, and where the smallest variations in prices have a strong effect on the purchasing power and negative implications on the livelihoods of many such pressing issues such as high (rising) prices of essential goods  need to be dealt with in an informed and preventive manner.

The government’s role of protecting the vulnerable against price shocks; alongside with increased capacity to prevent and /or react to supply constraints of essential goods thus comes into focus.  The public policy responses to such concerns regarding scarcity generally include

·            Building up strategic reserves of key commodities

·            Implementing price controls

·            Establishing consumer cooperatives

·            Anti-hoarding policies and legislation

·            Rationing.

These government centered measures and interaction with the private sector are criticized by those who support a minimal state interference in the economy and a market based approach to dealing with scarcity. The criticisms have been primarily on the grounds that the measures are difficult to implement, may not work well, and are likely to be expensive for the government, and not achieve efficiency of public funds spending. Furthermore, experience shows that strategies such as price controls have often resulted in long term disincentive effects for local production; they have also generally resulted in long term disadvantage to consumers.

Nonetheless, there is a need in Afghanistan to implement measures to shield consumers from the worst consequences of sudden vagaries in supply and efforts at deliberate market manipulation. There is also a need to build up the technical capacity to deal with scarcity and diminish the occurrence of fraud in markets.

On the Policy front, we must therefore ensure that markets behave democratically where none of the players have undue advantage in controlling the market behavior.  And here comes the argument of a self correcting competitive market structure that provides for a level playing field to its participants.

As a general proposition (rule), all citizens benefit from competitive markets, whatever the state of development of the country that they live in, except that the process of intensifying competition may lead to certain part of the population to be immediately benefited, while others are actually penalized, such as firms going out of business and workers losing their jobs. Other policies are needed to deal with the dislocation that is caused by the loss of inefficient firms, and to help redistribute available resources such as human capital, efficiently onto the market. On a micro-economic level, the competition brings about immediate ‘losers’ and ‘winners’ while overall (macro-economic level), the economy definitely benefits from an intensifying competition, availability of more consumer choices, growth and development. The key is thus a fair and regulated distribution of resources, allowing for the positive effects of competition to come into play.

If a country does wish to base its economic development on free-market principles and the process of competition, such as envisioned by the  Article 10 of the Afghanistan Constitution  a much better solution is the adoption of a competition law that prohibits anti-competitive practices .The existence of such a law  shall provides clear and unequivocal signal to all stakeholders: that competition is a benefit to society as a whole and is something that enhances consumer and producer welfare, in a fair and equitable manner.

With a demonstrable sense of certainty for fairness, markets would naturally grow, investments will pour in and the road that ends in war will have a silver lining that will soon glitter as gold. Because the biggest incentive will be profit. In the case of undue increase in prices of essential goods that Afghanistan has experienced, through an effective competition mechanism, it can be ensured that the markets are not being manipulated in any unfair way, such as through collusion and price gouging. 

 Those having doubts about the prescription, if it applies to the state in which Afghanistan in now may like to take note of what the 2001-Nobel Prize winner economist Joseph Stiglitz said “Strong competition policy is not just a luxury to be enjoyed by rich countries, but a real necessity for those striving to create democratic market economies”. 

Published: Afghanistan Times; 20 September 2012