American and NATO troops will soon be moving out of Afghanistan, and people are asking whether the Afghan army will be able to provide security. An equally important question is: Will the Afghan economy be able to provide for the country?
Without a viable economy, there is little prospect of Afghanistan ever paying for its own security; little hope of its government gaining legitimacy; and not much chance of creating opportunity to counter the insurgency.
Afghanistan’s economy is at risk of a “negative multiplier”: A withdrawal of funds that precipitates an abrupt slowdown. Afghanistan has been growing strongly, at an annual rate of more than 10 percent, over the past five years. But this performance has been fueled by massive inflows of international military spending and aid. From 2010 to 2011, military spending was estimated at more than $100 billion, while spending on aid could be as high as $15.4 billion. Total gross domestic product is about $16.3 billion. As the troops withdraw, support will shrink. Private consumption is closely linked to military spending and aid.
Afghanistan is a poor country that can ill afford an economic reversal, especially when it faces rising security challenges. It languishes near the bottom of development rankings, placing 155th on the U.N. Human Development Index in 2010 for its performance in health, education, income and other indicators. The withdrawal of military spending and external aid will hit hardest in construction and services, particularly transportation, distribution and security.
Afghanistan’s partners need to anticipate the effects of this spending drawdown to better soften the blow. Given tight budgets, Afghanistan will need more efficient aid combined with proven delivery mechanisms to ensure that every dollar helps the Afghan people.
First, militaries and donors could do more to increase spending within Afghanistan. Total aid to Afghanistan last year was equivalent to 91 percent of its economy, but most military and other aid was spent outside the country. Even if these amounts decline, they will still be big numbers for the Afghan economy. Redirecting more funding to local contractors and suppliers so that it is spent in Afghanistan and employs more Afghans could have a significant softening effect.
Second, more aid should go through the Afghan government. Only 15 percent of aid is expended through the government’s budget. Connecting aid to the budget can raise the share of contracts won by local businesses. Donors will, of course, need to build capacity within the Afghan government, including rigorous anti-corruption safeguards. Yet the able Finance Ministry has used financing through the budget to increase transparency, fiduciary oversight and supervision of other ministries. The World Bank and the Afghanistan Reconstruction Trust Fund deliver assistance through the budget in partnership with Afghan ministries. Afghans cannot take control of their destiny if donors bypass the government. Development does not work without local ownership.
Third, Afghans can help themselves if they can pay for more themselves. Current trends show that domestic revenue could increase 16 percent a year, climbing to around 13 percent of GDP by 2019, largely driven by progress in customs reforms, a new value-added tax in 2014 and collection of mining revenue. But if external support declines rapidly, the gap between money coming in and going out will grow. That gap will have to be filled for a period by foreign donors.
Donors can support all these objectives by recommitting to the Afghanistan Reconstruction Trust Fund. The fund is financing many of the programs that represent success stories, including the National Solidarity Program, a community-driven development initiative; other successful programs include education for boys and girls; rural access roads; a basic health program; and a credible public financial management system.
Fourth, more needs to be done to increase private-sector investment. Afghanistan ranks 167th in the World Bank’s Doing Business report. Beyond security and corruption, obstacles that businesses face include expensive and unreliable power, no proper land registration system and weak legal structures. Yet Afghanistan has a wealth of resources in the largely neglected, underfunded mining sector. With private investment to help fund exploration, improve capacity and build appropriate infrastructure, mining, oil and gas could boost the country’s economic development. Agriculture can improve on its traditional place as Afghanistan’s economic mainstay; more investment will be needed in irrigation and across the production chain to get produce to domestic and foreign markets.
Afghans have made real, measurable economic progress in recent years. We need to build on that progress — not abandon it. The security transition strategy needs a complementary strategy for economic transition. An army without an economy is doomed. A precipitous and unplanned economic withdrawal will throw away gains paid for with blood. Afghanistan needs to stand on its own. But Afghanistan’s partners need to plan now — together, coherently and with the government — for how the country will reach that point.