World economics: global systems and trade

Afghanistan Economy

The future of economic growth in Afghanistan is based soundly upon meeting several important prerequisites for economic growth.

Years of political instability and warfare left Afghanistan with an economy that was essentially in tatters. This paper will provide a review of thought statistical background of Afghanistan's economy, and describe Afghanistan's prospects for economic growth in the past decade and today. Today, realistic expectations for future economic growth in Afghanistan are based upon both the influx of foreign aid, and the ability of the country to meet prerequisites for economic growth which include political stability, infrastructure, health and education, good governance, and effective monetary policy.

Prerequisites for Economic Growth

There a number of important prerequisites for economic growth in any developing country (Parliamentary Assembly Council of Europe). These include the creation of a modern infrastructure, political stability, tax incentives that attract foreign businesses, and adequate workforce education and training. In a report entitled Improving the Prospects of Developing Countries, the Committee on Economic Affairs and Development of the Parliamentary Assembly Council of Europe "emphasizes the need to ensure better governance in the developing countries themselves, accompanied by more democracy and rule of law, a greater respect for human rights, as well as regional and internal peace and stability." long-term strategy of export promotion is often thought to be a prerequisite to economic development. Notes the Parliamentary Assembly Council of Europe, "Advocates of this strategy claim that an immediate opening up to the world market is the sine qua non-of development and cite as an example the rapid growth that has occurred in South Korea, Taiwan, Hong Kong and Singapore." In contrast, other economists suggest that an initial isolation of a country from world trade can be importance in encouraging the growth of domestic industries. This strategy, often called import substitution, attracts a great deal of criticism and argues that building a strong the domestic base is necessary before a country can become effectively involved in international trade (Parliamentary Assembly Council of Europe).

An important factor in improving the economic growth in Afghanistan is the education of the country's women. In Afghanistan, for every 10 men who can read, there are only three literate women. While the education of women clearly falls within a human rights framework, such education also has important implications for economic growth. It is clear that a greater education level and workforce training in a country is an important prerequisite to economic growth and development (Parliamentary Assembly Council of Europe). The Parliamentary Assembly Council of Europe also notes that "education is absolutely crucial to development" in terms of improving public health.

History of Afghanistan

Any analysis of the economic prospects of a country is deeply dependent upon an understanding of that country's history. In the case of Afghanistan, an understanding of the degree of war and civil unrest within the country is especially relevant. The country's recent history is one of invasion by the Soviet Union, the rise and fall of the Taliban, and recent attempts to bring democracy to the nation (CIA World Factbook).

In 1979, Afghanistan was invaded by the Soviet Union. Ten years later, anti-Communist mujahidin forces forced the Soviet Union to withdraw from the nation. These anti-Communist mujahidin forces were backed by a number of entities, including the United States, Pakistan, and Saudi Arabia. This new regime ultimately collapsed in 1992, and fighting broke out among the various mujahidin factions. In 1996, the Taliban, which had been backed by foreign sponsors, assumed power. However, the Taliban was toppled in late 2001 by a United States, Allied, and Northern Alliance military action that was spurred by the terrorist attacks of September 11, 2001. The Afghan Interim Authority (AIA) was born, and Hamid Karazi was elected as President by the Transitional Islamic State of Afghanistan (TISA). A new constitution was signed on January 16, 2004 that provided basic protection for human rights, a moderate role for Islam, and a strong executive. Nationwide elections would formally establish the Government of Afghanistan (CIA World Factbook).

Today, Afghanistan remains marked by a degree of political turmoil and uncertainty. The CIA World Factbook notes that the political situation in Afghanistan includes "occasionally violent political jockeying and ongoing military action to root out remaining terrorists and Taliban elements."

Further, thousands of Afghan refugees live in Iran and Pakistan, and Pakistan routinely sends troops to control the border (CIA World Factbook).

Statistical Look at Afghanistan's Economy

Located in Southern Asia, and bordering Pakistan and Iran, Afghanistan has a total population of approximately 28,513,677 people, based on July 2004 estimates. The population growth rate is 4.92%. The population is 80% Sunni Muslim, with a substantial Shi'a Muslim minority of 19%. A number of ethnic groups are present, including the Pashtun at 42% of the population, Tajik (27%), Hazara (9%), and Uzbek (9%). Literacy rates among males are 51% and 21% among females, based on at 1999 estimates (CIA World Factbook).

The GDP growth rate in Afghanistan is currently 29%, based on 2003 estimates. This level reflects the low levels of activity between 1999 and 2002, the end of a four-year drought, and donor assistance during this time. The GDP per capita income, based on purchasing power parity, was 700 U.S. dollars, based on a 2003 estimate (CIA World Factbook).

The rate of inflation in Afghanistan runs at 5.2%, based on 2003 figures. 23% of the population lives below the poverty line, according to 2002 figures (CIA World Factbook).

The labor force consists of 11.8 million people, based on 2001 estimates. 80% of the labor force is involved in agriculture, 10% in industry, and 10% in other services, based on a 1990 estimate. Unemployment figures are unavailable (CIA World Factbook).

Current legal exports run at approximately $98 million, according to a 2002 estimate. This figure does not take into account illegal exports. Major commodity exports include opium, carpets, wool, fruity nuts, jems, and hides and pelts. Major export partners include the United States (26.1%), France (17%), Pakistan (17%), and India (16.1%), based on 2003 estimates (CIA World Factbook).

Natural resources include petroleum, natural gas, full, sulfur, talk, and chromite. 12.13% of the land is arable, and 0.22% is in permanent crops. 23,860 square kilometers of land is irrigated (CIA World Factbook).

The current budget lists revenues at $200 million, with $550 million in expenditures, based on a 2003 plan. External debt in the nation hovers at approximately $8 billion, most of which is owed to Russia. $500 million in debt is owed to the Multilateral Development Banks. Currently, $4.5 billion is allocated in international aid through to the end of 2006 (CIA World Factbook).

In the last decade, Afghanistan's rate of inflation and GDP per capita has reflected the political instability of the nation. The rate of inflation in Afghanistan in 1994 was 20% (Economic Cooperation Organization). Estimated inflation rate (consumer prices), based on a 1996 estimate, ran at 240% (Coutsoukis). In 2001, inflation ran at -43.4%, and at 52.3% in 2002 (% Annual Change in CPI) (Economic Cooperation Organization).

Afghanistan's former central banker from 1994 to 1996, Abdul Qadeer Fitrat, notes that central control over monetary policy was virtually nonexistent. Fitrat noted that it was commonplace during his tenure to pay for soldiers and weapons. In response, he noted inflation would increase up to 800%. In 1995, he noted that forces opposing the central government also printed money to finance the war (BBC.com).

Afghanistan's GDP growth rate for the years 1994-2002 is not available. In 2003, the GDP real growth rate was estimated at 29% (Coutsoukis). In 1991/1992, Afghanistan's GDP was estimated at $104 per capita, down from the estimated 1981 GDP per capita of $250. In the late 1990s, GDP per capita was estimated at about $300, but was reduced to $200 in late 2001 due to drought and intense fighting (United Nations Office on Drugs and Crime). It is important to note that these figures do not include income that is related to opium, which is essentially impossible to estimate (CountryWatch).

It is important to note that the macroeconomic data available for Afghanistan is often unreliable. This is due to a lack of resources and skills in the current government that are required to measure macroeconomic aggregates (CountryWatch).

Economic History

Ten years ago, Afghanistan's prospects for economic growth were dim, at best. In 1992, anti-Communist mujahidin forces were toppled, and the country remained mired in infighting between various mujahidin factions until 1996, when the Taliban seized control (CIA World Factbook). Throughout this time, Afghanistan was tightly in the grip of war and political instability. As such, the country did not have many of the necessary prerequisites for economic growth, including modern infrastructure, political stability, tax incentives to attract foreign businesses, and good education and training.

The economic situation in the past decade in Afghanistan has been one of virtual economic ruin. The United Nations Office on Drugs and Crime notes succinctly, "two decades of war created much hardship for the people of Afghanistan. The country's infrastructure was destroyed, its human resource base depleted and its social capital eroded. The majority of the population was left extremely poor, lacking food, clothing, housing and medical care. The economy virtually collapsed..." During this time, any formal financial sector was essentially nonexistent, basic infrastructure was lacking, and a severe drought from 2002-2001 further ravaged the economy (United Nations Office on Drugs and Crime).

During this decade, violence and political instability had a tremendous impact on Afghanistan's economy. Inter-regional trade was greatly disrupted, and often brought to a virtual standstill by violent instability. However, the appearance of the Taliban regime saw improvements in inter-regional trade in areas controlled by the regime (United Nations Office on Drugs and Crime)

In the last decade, the opium trade played an important role in Afghanistan's economy. In an economy where the monetary system was virtually destroyed by prolonged war, opium "became both the medium of exchange and the only form of saving" (United Nations Office on Drugs and Crime) in opium-producing areas. The growth in illicit opium was profound, and average annual growth rate for the opium trade held at 19% between 1989 and 1994 (United Nations Office on Drugs and Crime).

Overall, Afghanistan's prospects for economic growth in the last decade were extremely poor. The United Nations Office on Drugs and Crime noted, "as of late 2001 all available social and economic indicators pointed to Afghanistan being the country on the verge of complete collapse, having already been close to social and economic breakdown for many years before." The basis of this poor economic outlook rested largely in the country's horrific history of political instability and war.

The Future of Economic Growth in Afghanistan

Today, the Afghan economy remains marked by "enormous poverty, a lack of skilled and educated workers, a crumbling infrastructure, and widespread land mines" (CIA World Factbook). As such, the future of economic growth in Afghanistan depends largely upon overcoming many of these obstacles.

Today, realistic expectations for future economic growth in Afghanistan rest upon the successful establishment of a number of perquisites for economic growth. The USAID notes, "For years, Afghanistan had a dysfunctional economy based on illicit drug trade and the business of war." In order to create economic growth, Afghanistan's economy must be radically transformed. Prerequisites for future economic growth in Afghanistan include the establishment of political stability and good infrastructure, a reduction in the opium trade, improvements in health, education, and the status of women, improved governance, and an increase in political and social freedoms.

One significant impediment to future economic growth in Afghanistan is poor infrastructure. The U.S. Agency for International Development (USAID) notes, "Years of unrest in Afghanistan, followed by Taliban rule, has left public infrastructure in ruin. All sectors of the economy struggle when poor roads prevent the transport of goods, or a shortage of clean water affects a community's health" (USAID).

The current state of telephone service, communications, highways, and airports reflects the relatively poor state of infrastructure in Afghanistan. Telephone service is highly limited, with only 0.1 telephone line per 10 people. However, telephone service is improving as two mobile phone operators were established as of 2003. Radio broadcasts are also limited, with seven AM stations (six of which are inactive), one FM station, and one shortwave station. At least ten television stations are available in the country, including one government-run central television station that is located in Kabul. Internet access is increasing through the creation of a nationwide network that includes public kiosks in Kabul, and Internet cafes (CIA World Factbook).

Afghanistan has 2,793 km of paved highways, and 18,207 km of unpaved highways. The major port is Kheyrabad, Shir Khan. There are 10 airports with paved runways, and five heliports (CIA World Factbook).

A number of USAID initiatives are helping to improve public infrastructure in Afghanistan. These include the construction of a ring road (the Kabul-Kandahar-Herat Highway), which the USAID optimistically notes, has "revitalized entire villages" (USAID), by increasing access to health care, schools, jobs and markets. USAID notes, " at the national level, the highway has already begun to contribute to Afghanistan's improved economic growth, security and national unity."

Current efforts to reduce the opium trade may have a significant directly negative effect upon Afghanistan's economy. Today, opium has surpassed wheat as the largest single agricultural product in Afghanistan (CountryWatch). As such, abolishing the opium trade should have a negative economic impact.

At the same time, the drug trade plays an important role in instability within Afghanistan (CIA World Factbook). Specifically, some funds generated through the opium trade have been used in insurgency funding (CIA World Factbook).Thus, reduction in the opium trade seems necessary in order to increase stability, an essential precursor to economic growth. Making this task especially difficult is the fact that several government groups profit from the opium trade (CIA World Factbook).

In addition, the opium trade in Afghanistan has been linked to the spread of drug-related HIV, abuse, and trafficking, therefore creating more impetus to stop the opium trade (United Nations Office on Drugs and Crime).

Today, Afghanistan is the largest producer of opium in the world. Despite eradication efforts by the government, cultivation of the opium poppy (which is used to make heroin) has increased in recent years. In 2002, cultivation of the poppy expanded to 30,750 hectares. The potential opium production from this is 1,278 metric tons. Between 80 and 90% of heroin that is consumed in Europe comes from Afghanistan. Further, Afghanistan is especially vulnerable to money-laundering through narcotics (CIA World Factbook).

Other illegal drugs are produced in Afghanistan, and some exported. The country contains numerous narcotics-processing laboratories, and also produces hashish (CIA World Factbook).

Today, Afghanistan's agricultural economy is reeling from the effects of a four-year drought, coupled with the devastating impact of political an economic instability. Close to 70% of Afghanistan's population is involved in agriculture, and this significant population was dramatically hurt by Georgian instability (USAID).

Economic growth in Afghanistan will be linked closely to improvements in the agricultural sector. Notes USAID, "Revitalizing agriculture is key to the growth of the Afghan economy." As such, USAID is attempting to stimulate the economy by rehabilitating irrigation systems, providing a fertilizer, seeds, agricultural equipment, and tools. The aim is to increase productivity and intercultural sector, as well as increase stability (USAID).

Improvements in Afghanistan's education and health systems may also play a role in improving economic growth in the country. As of the year 2000, 97% of women did not attend school, and the end of Taliban rule saw the damage or destruction of 80% of the country schools. The average life expectancy for the Afghan people is about 46 years of age, and the "health status of the Afghan people is among the worst in the world" (USAID). USAID is currently involved in improving basic health and nutrition among those in Afghanistan, and the building schools and providing school supplies and training materials (USAID). If effective, these improvements in education and health will go a long way to creating an environment where economic growth can flourish.

In a similar vein, improvements in the status and education of Afghanistan's women will be an important factor in the country's economic growth. Under Taliban rule, women were banned from public life, punished for showing their faces, denied education, and commonly stopped from working outside the home (USAID). USAID has provided resources to improve the status of women in Afghanistan, including establishing a Women's Resource Center in Kabul, and integrating a focus on women within sector programs such as democracy, governance, agriculture, health, and education (USAID).