Mohammad Ismail / Courtesy Reuters Afghan boys play on a destroyed car at a hilltop in Kabul October 18, 2012.

Afghanistan's Aid Bubble

Letter From Kabul

Afghanistan seems to be holding its breath. Business has ground to a halt and middle-class Afghans are eyeing foreign escape routes as they send their money out of the country. The sense of uncertainly is not just about who will be the next president, or whether the loser will accept the result. It’s about the precarious economy.

The Afghan economy has seen a dozen years of rapid change. The international community dumped loads of money into the country, with some positive results. Life expectancy has climbed by about ten years, and more children than ever attend schools. The supply of electricity has increased. And activists have put human rights and tolerance on the public’s radar: no longer confined to their homes as they were during Taliban times, Afghanistan’s women even boast a national cycling team, the members of which freely wheel through conservative rural communities, at least those near Kabul. 

But the aid has also become a trap. The West's billions have proved too small to modernize Afghanistan and too large for Afghans to properly manage. The aid has gone to the wrong places: Rather than channeling funds into stable regions where it might spur local enterprise, economic aid has gone toward quick-impact projects in the volatile south and east. In addition, the money has created a massive force of workers who service NGOs and international agencies, distorting local wages, property, and lifestyles. The end result is an aid bubble. When bubbles rupture in wealthy countries, many people lose jobs, houses, and hope. In a country that is already near the bottom of the list on most development indicators, economic destabilization could erase the past decade’s social gains. 

UNAIDED

As the international community withdraws from Afghanistan, it would be reassuring to declare “Mission Sort of Accomplished.” Yet even that is an overstatement. GDP growth tumbled from about 14 percent in 2012 to about three percent last year. Analysts predict even slower growth this year. Meanwhile, foreign aid has been cut; over the past half year, USAID, for instance, has reduced its spending in Afghanistan by half. As a result, Kabul faces a deficit of approximately $400 million, equal to about 15 percent of its revenue. 

In the past, the international community has simply coughed up more funds to cover such shortfalls. But it is hard to see where the money will come from now. Approximately 64 percent of Kabul’s operating budget goes toward maintaining and professionalizing the police and military. Although there are plans for Afghanistan to gradually reduce that support by almost a third, it is hard to envision Kabul actually doing so before it resolves its conflicts with the Taliban and other militant groups, including those spawned by Pakistan's intelligence agency. 

Other budget lines that Kabul could conceivably cut -- including education and health -- are already too lean. Kabul allocates only about 13 percent of its operating budget to education. The health sector receives only 1.3 percent; the slack, again, is picked up by Western NGOs and the UN. Shortchanging these line items is a recipe for disaster; in the coming years demand for such services will only grow. By 2030, the population is projected to expand from about 30 million to 53 million. To educate all those new children, the country needs to build about 1,000 new schools and hire 10,000 additional teachers each year. Last year, despite large international grants, the country hired only 5,000. To glance across the border at the jihadist-recruiting madrassa schools in Pakistan is to foresee the violence that erupts when education and subsequent employment prospects are slight.

Infrastructure is another expense that cannot be neglected. Although three-quarters of Afghanistan’s residents depend on farming, agricultural improvements count for just seven percent of total public spending. And because of displacements caused by 30 years of wars, waves of Afghans continue flocking to city slums. But little of the Afghan government’s spending on infrastructure benefits these people. A look at the national budget for 2013 reveals a bias toward the well off. The government spent more on a golf course than it did on improving science and math education programs. A VIP lounge in the Kabul Airport was allocated twice as much funding as a national technical institute. Authorities delegated nearly ten times more from their discretionary budget to building stadiums than to building irrigation networks. And millions has been dumped into paving and repaving roads while the country’s sanitation system has gone neglected.

VERY TAXING 

To cover all of these expenses, the International Monetary Fund has suggested that Afghanistan start raising revenue through a value-added tax. By and large, however, the most active consumers are the country’s elite. And they have a poor track record when it comes to paying taxes. A 2011 U.S. State Department report suggested that nearly $4.6 billion in undeclared and untaxed income leaves the country each year. It would take a huge shift in mindset for Afghanistan’s top one percent to stop siphoning off from society and to start contributing to it.

Afghanistan might also look to customs revenues, which ordinarily comprise a hefty chunk of government income. But such income has decreased this year. Customs managers, who are Karzai loyalists, seem to be anticipating their post-election replacement by pocketing upwards of 50 percent of duties instead of their usual 20 percent.

Another revenue stream could be narcotics. The country’s informal narcotics economy generates more revenues than the formal economy -- $4 billion from opium alone, compared to $2.5 billion for the formal economy. About $1 billion of the drug trade goes to farmers, and the rest flows into the hands of warlords, government officials, and the Taliban. Warlords, in particular, have invested portions of the fortunes they amassed in local real estate; it’s an opportunity to reinvest some of their profits. In the process they gain some stake in  the country's economy. That could be encouraged further.

Of course, foreign aid will also continue after the last Western troops depart: according to the terms of the 2012 Tokyo Conference, held between international donors and Kabul, international donors will keep sending $4 billion in aid each year through 2015. But, in Tokyo, donors imposed two conditions: Afghanistan must ramp up its natural resource sector and overcome corruption.

Although a new mining law may be finally moving through parliament, the country’s vast potential mineral wealth, thought to be worth about a trillion dollars, continues to furnish next to nothing for the treasury. Mining projects and a proposed regional gas line, which would provide income through transit fees, are on hold. Taxes on mineral profits bring in less than the cost of operating the ministry of mines. Besides being jittery about security, potential foreign investors are skeptical about the government's honesty, transparency, and consistency. 

Corruption is a trickier problem. Officials have generally used their positions to pocket what they can. During the aid bubble years, there was so much money swirling around for so many roughly similar initiatives that, when donors didn’t pay-up, their projects could be “lost” in bureaucratic channels. Under the new president, Afghanistan may try to take on the management, upkeep, salary, and pension responsibilities of foreigners’ initiatives but, if the bureaucracy isn’t reformed, that will probably be too expensive to bear.

Still, a day of reckoning could be at hand. In late June, the Financial Action Task Force, a multilateral organization that investigates money laundering, will decide whether to blacklist the country’s banking system. If it does, the FATF can charge warlords and high-level officials with financing crime -- even terrorism. This transparency may limit their graft or else push them to invest money in clean local projects.

HOPE AND CHANGE

The next president faces several choices. Because many of the West’s conditions for aid subvert the very livelihoods of corrupt officials and drug-connected elites, cleaning house won’t be easy. But if Kabul neglects the task, the aid community will recoil.

Monitoring how foreign aid gets spent will be complicated.  These days, the security risk is so high that few aid workers venture outside of their fortified compounds. To make remote management easier, the international community could change the way it distributes aid. In Tokyo, donors pledged to funnel much of their future foreign aid straight to the government. That gets aid organizations out of harm's way, but it increases the need for independent watchdog organizations. Up until now, the aid community has relied on field visits by civilian development workers, aerial technology, and independent Afghans organizations to verify that projects are meeting expectations. 

These approaches are helpful, to a point. But donors must also sustain independent institutions that engage citizens. The past decade has seen the establishment of a free press, in which, reporters can inform, educate, and create demand. Media can be nothing less than a core force in state building. If Afghans don’t understand their options for offering feedback addressing government misspending, the status quo will endure. 

If the new president can earn the public’s respect, the next election won’t hinge on those old warlord factions. At least in part, the president will have created interest groups that offer citizens broader access to the political system. Out of this de-concentration of power should come pressures for accountability.

As dire as Afghanistan’s prospects look, some of the West's institutions are starting to take hold. A huge young population is embracing modern ideas while still remaining Muslim. This June, three Afghan high school students from Kandahar won gold medals at a science competition between students from 76 countries held in Turkey. Twelve years ago the Taliban suppressed such studies. Although Afghanistan has not yet lived up to the West’s and Afghans’ own aspirations, the groundwork has been laid. It would be pure folly to let it go to waste. 

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