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Economic crisis

August 5, 2011

As the first US and NATO soldiers leave Afghanistan, concerns are growing that funds to the country's troubled economy will be withdrawn as well. Will Afghanistan plunge into an economic crisis after the 2014 pullout?

Afghan villagers in Murgham
Most Afghans are poor farmersImage: AP

Mazar-e-Sharif, near the Uzbek border, is considered one of the most secure places in Afghanistan.

Far away from the Taliban-troubled south and east, the city and the surrounding Balkh province have become a safe haven for foreign investors and local businessmen. Border trade is likely to grow further once the first cargo trains move along the newly built railroad linking Mazar-e-Sharif to Uzbekistan via the Hairaton border station.

In a country that is still crippled by war, Mazar-e-Sharif has become an economic boom-town. And it is one of first cities where NATO-led German troops have handed over security control to the Afghan army.

German soldiers near Kunduz
Once the soldiers are gone, foreign aid is likely to shrinkImage: dapd

While Mazar-e-Sharif seems to tell a story of success, the economic picture looks a lot grimmer in the rest of the country. Every second Afghan is unemployed; others are poor farmers that survive only with vast amounts of foreign aid. According to the World Bank, 91 percent of Afghanistan's economy is linked to international funding.

The United States has spent about $19 billion (12.6 billion euros) in civilian aid since the beginning of the military operation in 2001 - more than for any other country, including Iraq. With about two billion euros in development aid to date, Germany ranks third on the list of the biggest contributors.

No aid, no growth

But support is expected to shrink once all the troops have withdrawn. "We have heard unofficially, but very clearly from many European and other Western governments that when the soldiers go, the money will go with them. I am afraid that after 2014, Afghanistan will be treated just as any other developing country," Thomas Ruttig, a researcher with the Kabul-based Afghanistan Analysts Network told Deutsche Welle.

In June, a US congressional study warned that Afghanistan could be left in the midst of a "severe economic depression" after the 2014 pullout.

The same study found that roughly 80 percent of the US Agency for International Development's (USAID) funds are spent in troubled Southern and Eastern Afghanistan, but that most of those funds have been poorly spent on short-term stabilization projects instead of longer term development initiatives designed to promote growth.

"The economic sectors linked to the international military presence will clearly lose their importance once the troops have gone. The bigger problem is that the jobs and projects that have been financed by development aid are not enough to promote economic development," Sayfuddin Sayhoon, an economist at the University of Kabul, told Deutsche Welle. He said that the government does not have a clear economic strategy, but relies heavily on foreign aid.

Road-construction in Helmand
Aid money is being invested in building roadsImage: DW

A lot of money is also trickling away in corrupt channels. "There is a loosely knit system of political patronage. The biggest economic entrepreneurs are very often linked to political circles in Kabul - and they know how to access international funds", said Ruttig. In Transparency International's 2010 corruption index, Afghanistan is ranked as the third-most corrupt country worldwide. But so far the government of President Hamid Karzai has been reluctant to prosecute corruption.

Ruttig also sees a danger in the tendency to privatize development aid. While governments used to entrust certified institutions with the implementation of aid projects, many donors, especially the US, now rely on private contractors that often do not have the necessary know-how or put the money into their own pockets. In the end, the tax payer can not really know whether the money he spends for the reconstruction of this war-torn state is effective.

"Many countries, including Germany, don't allow for an evaluation of what has been done in their development projects. Maybe this is a sign of a bad conscience, because some of the projects have indeed failed," said Ruttig.

A booming 'drug economy'

Stephan Kinnemann, economist
Has advised Hamid Karzai on economic matters: Stephan KinnemannImage: dw-tv

Looking at growth rates, the Afghan economy has on the surface made steady progress. But the figures strongly depend on the performance of the agricultural sector. A bad harvest is enough to let the growth rate drop.

"Building up an economic system from scratch is tough, especially when the infrastructure is destroyed and the intellectual elite has left the country," Stephan Kinnemann, a German economist, told Deutsche Welle. He worked as the German government's economic advisor to President Karzai between 2002 and 2006.

Kinnemann's concept for a new Afghan economy combined features of the classic German social market economy with basic principles of Islam, like "zakat," a commitment to donate to charity. Kinnemann wanted to build up an Afghan middle class with a small business sector and attract foreign investment. But many of his ideas did not survive.

The one economic activity that has survived, even flourished, during and after the war, is the drug industry. Afghanistan is the world's number one drug producer. Over 90 percent of illicit drugs peddled worldwide, primarily opium and hashish, come from Afghanistan. An estimated 13 percent of the Afghan population are directly or indirectly involved in this drug economy.

Ruttig said that both the insurgents and the political elite are protecting and benefiting from the drug industry. But he also criticizes the international community for not tackling the problem of poppy farming. "They did not want to take away the only source of income for Afghans, which then would drive those poppy framers into the arms of the insurgency," he said.

Afghan farmers on opium poppy fields
The opium industry is making record profitsImage: picture alliance/dpa

The fact that the drug production has even boomed in the past few years does not shed a good light on the international military presence. The US had long relied on a good relationship with Ahmed Wali Karzai, the President's brother who was shot dead in Kandahar last month. Ahmed Karzai, a drug lord himself, was needed to strengthen security control in the restive southern part of Afghanistan.

"The international community is pointing fingers at the Afghan drug industry. But at the same time, almost 70 percent of all drugs are produced in the province of Helmand, which was under British, and then under American security control," said Afghan economist Sayfuddin Sayhoon. While foreign troops will be gone by 2014, experts estimate that it could take 20 to 30 years to destroy the Afghan drug industry.

Poor, rich Afghanistan

While the opium poppies are blooming, most other fields are running dry. "The international community has completely failed to promote the agricultural sector," said Stephan Kinnemann. He adds that 20 to 40 percent of the crops rot, because there are no proper transport routes and cooling systems. This is one of the reasons why many farmers rely on poppy, because it's more efficient than growing wheat or rice.

Afghan workers in a coal-mine
Afghanistan has huge mineral reservesImage: picture alliance/dpa

Other sectors that could provide long-term growth still need major investments. Natural resources of copper, iron ore, and lithium are plentiful in Afghanistan, but so far they have hardly been mined. While daily reports about attacks and killings discourage most Western companies from investing in Afghanistan, the Chinese are pushing billions into the copper mine Aynak, 30 kilometers (18 miles) east of Kabul.

Kinnemann said that only a few German medium-sized enterprises are doing business in Afghanistan, but when it comes to the legal conditions risk-aversity is not necessarily justified. One of his ideas that has survived over the past 10 years is the Afghan Investment Support Agency (AISA). It was created in 2003 to facilitate registration and licensing of private investments in Afghanistan. For Kinnemann the AISA is a success: According to the World Bank's 2011 "Doing Business" figures, it takes fewer bureaucratic steps and days to start a business in Afghanistan, than it does in Germany.

Boosting agriculture, mining and foreign investment are long-term development objectives that require a long-term commitment by the international community.

"An economic depression could sling Afghanistan back for years and it could end up as a failed state like Somalia," warned Ruttig. At the moment neither Washington nor Berlin seem to have an idea about the size of their aid budget for Afghanistan after 2014. But security comes at a high price in Afghanistan. And so does economic stability.

Author: Julia Hahn
Editor: Rob Mudge