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Afghanistan's Crucial Economic Transition

Author: Jayshree Bajoria
December 5, 2011

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World leaders met in Bonn, Germany, on December 5 to chart the roadmap of engagement in Afghanistan (DeutscheWelle) post-2014 when most foreign troops will leave the country. Yet Kabul's ability to assume security, political, and economic responsibilities is increasingly in doubt. Many estimates say a drawdown in international aid will leave Afghanistan unable to sustain current levels of growth, pay for the increasing security forces and civil sector employees, and invest in infrastructure. The United States, which has about one hundred thousand troops deployed in Afghanistan and spends more than $7 billion per month (PDF) on the Afghan campaign, has been pushing a New Silk Road strategy, which aims at transforming Afghanistan into a regional hub of commerce through trade and infrastructure development. The other economic driver being touted is Afghanistan's vast mineral wealth, largely untapped deposits of iron ore, copper, lithium, and rare earths reportedly valued between $1 and $3 trillion.

What's at Stake

The conference, aimed at laying the groundwork for Afghanistan's future, focused on security and economic transition. Economic stability is crucial for Afghanistan's security and political stability, which will also determine the future of a region marked by rivalry and competition. In 2010, nearly 92 percent of all Afghan public spending was financed by foreign aid. A decline in this aid, warned the U.S. Senate Foreign Relations Committee in June, may result in an economic recession. A new World Bank report projects a financing gap of 25 percent of GDP by 2021, further threatening security and stability. A November IMF report (PDF) adds that endemic corruption and the narcotics sector (opium exports were about 23 percent of GDP in 2010) have undermined the rule of law and contributed to a poor business environment.

The Debate

While some analysts have lauded a regional strategy (CNN) for economic growth as envisioned in the Silk Road initiative, others have been more skeptical, given the geopolitical rivalries among Afghanistan's neighbors (Diplomat).

The Afghan government and its international donors have increasingly pointed to the country's mineral wealth as a potential savior of the economy. According to the World Bank, Aynak's copper and Hajigak's iron ore deposits would yield about $3 billion in mining investment; each mine could also draw as much as $5 billion in infrastructure investment. Together, they could earn $500 million in revenues within seven years.

To ensure that its natural resource wealth contributes to sustainable growth and benefits the population rather than becomes a curse that fuels conflict and corruption, Afghanistan has become a candidate for the Oslo-based Extractive Industries Transparency Initiative. But TIME's Aryn Baker writes that the Afghan minerals are hardly a silver bullet; they require huge amounts of infrastructure and a government that can manage revenues in a transparent and efficient manner.

Policy Options

Any economic development strategy for Afghanistan "needs more involvement from private-sector actors to be successful," writes Andrew C. Kuchins of the Center for Strategic and International Studies in Foreign Affairs. The World Bank recommends the Afghan government strengthen public financial management systems and the budget process, and reduce rent-seeking opportunities and leaks in revenue collection. It also states that fiscal viability will require a continuation of funding for most wage and non-wage costs of Afghanistan's security sector over the medium term, about $7 billion per year from 2014 through 2021.

Background Materials

Economist Edwin G. Dolan looks at Afghanistan's economic future, aid, and the potential for it to fall victim to a resource curse, at the Economonitor blog of Roubini Global Economics.

Foreign Policy.com offers a range of expert views on what Afghanistan needs and the challenges that the Bonn conference faces, such as Pakistan's boycott, the absence of Taliban participation, and a weak Afghan government.

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