Afghanistan is in Trouble: Private Sector Growth is Key to Stability

Private Sector Growth: The Key to Afghan Stability

By Jeffrey Grieco, Vice President and Board Member 

Afghan-American Chamber of Commerce and former Assistant Administrator, USAID

Afghanistan is now at a key pivot point in its fight for human development. Over the last 14 years Afghanistan received the largest economic, military, political and social support initiative ever attempted by developed nations for any single developing country. On both a per capita and GDP basis this support has brought huge waves of development capital, capacity development, security training and equipment, infrastructure and energy support, health and education support as well as strategic improvements in key sectors such as health, agriculture, livestock, irrigation, public works, water management, gender and human rights, etc. ..

Indeed, there is nothing that has not been touched by international assistance inside Afghanistan and yet Afghanistan continues to only slowly, incrementally improve its human development story. Why is it that this nation of deep historic and cultural experience has not grabbed the assistance provided to it and driven a more comprehensive economic development success story?

The good news is that many aspects of Afghan assistance have worked. Indeed, the sheer scale of the global response to 9-11 inside Afghanistan has had its deleterious effects but anyone who is reasonably knowledgeable about Afghanistan must admit that U.S. and international assistance programs have had important, strategic and sustainable impacts. Just in the areas of health and education alone, the progress from assistance provided by donors is undeniable.

For more clarity, look at how Afghanistan is now linked to the world. In 2001 nationwide internet was nonexistent. By 2013 nationwide internet access had dropped to an average of $300 and by the start of 2015 it dropped to only $35. While this was private sector driven, it occurred in the context of major investments in the economy by donors. Combine this increased internet access with the fact that eight out of ten Afghan women now have cell phone access when under the Taliban they had no access. Today women regularly use cell phones to talk to relatives, receive vaccine update information from medical providers, check on local security conditions, learn market prices for their crops and improve their children’s (and their own) literacy. This progress complements the improvements in maternal and child health (i.e. dramatically decreased death rates) and improved youth education (especially for young girls). In short, improved labor skills and education are broadening job participation as key components of economic growth.

Agricultural assistance programs have also returned Afghanistan from a nation that could not feed itself in 2002 to a nation that is a net exporter of agricultural products in 2015. As a major contributor to Afghan trade accounts, agriculture now helps narrow its trade deficit dramatically. Interestingly, the biggest licit exports are products that received large amounts of U.S. and international assistance over the last fourteen years. For example, dried fruits, medicinal plants, fresh fruits, animal by-products, nuts, oil seeds, cotton and carpets are once again major export products.  

The World Bank predicts Afghan economic growth will measure 5-6% in 2016-18. Current growth is anemic at only 2.5% but this rate should begin to rebound this year as international assistance led growth bottoms out and Afghan-led economic growth takes over. Of course, growth will be contingent on a number of factors including political stability, security and continued agricultural development. But with greater legal exports and a move into higher value added products and new investments in food processing this year combined with significant planned investments in irrigation and extension service training, Afghan illicit poppy farming will transition increasingly to licit crops.

There is one possible trump card: extractive industries. Improvements in basic infrastructure have occurred but major national investments in extractive industries and minerals resource development have fallen short. The single biggest sector for potential job creation, economic growth and tax revenue generation is the extractive industry sector. Harvesting major deposits of iron ore, copper and hydrocarbons are long overdue. If these investments get moving, Afghan economic growth could exceed forecasts in 2016-2018.

Afghanistan is poised and ready for growth. Core inflation has actually dropped to 4.6% (2014) down from 7.4% (2013). The economy has begun to stabilize from its international assistance led economy. In spite of major macroeconomic problems, it is transitioning to a private sector led growth economy. As President Ghani promised in London (December, 2014) with rapid and sustained reforms of major governance institutions and a major nationwide campaign against corruption, Afghanistan will be poised for real growth,  private sector development and long term job creation.