The Afghan Economy: Past, Present & Future  

(Updated May 12, 2000)

 

 By Omar Zakhilwal, Institute for Afghan Studies

 

 

Contents

 

 Afghanistan’s economy is predominantly agricultural covering more than 50% of Afghanistan’s Gross Domestic Product (GDP) and employing 85% of the Afghan population. However, even in times of peace the agricultural base is very narrow—the soil is fertile but water is scarce, only about 12% of land is cultivated and only one-third of that is irrigated, the rest being mountains and deserts. Nevertheless, Afghanistan is well endowed with minerals  such as iron ore, copper and bauxite which have not yet been exploited, natural gas (estimated reserve 100 billion cu. m.) and some oil (estimated at 11.63 million tons), coal and salt and therefore has immense economic potential.   

Classified as one of the least-developed countries, landlocked Afghanistan never had a modern integrated economy. Although the mountainous nature of the country has been an obstacle to national economic integration, the predominant factors for Afghanistan not being able to come out of the broken-backed state are political instabilities,  cultural rigidities, civil wars, foreign interventions and the like. After Afghanistan gained  its full independence from Great Britain in 1919, King Amanullah Khan Ghazi (1919-1929) embarked on a very ambitious program to reform and modernize the Afghan state.  During the reign of  King Amanullah Khan Ghazi Afghanistan witnessed a considerable change. This could best be summarized by passage from Huddleston’s[i]1928 report in which it says: 

It is becoming a modern state. Its road communication have been transformed. There is a well-trained army. There are excellent schools............ In the center of Asia what is almost a new country is in process of birth - or, at least, the old country is being metamorphosed.

However, at the end his efforts of 10 years of domestic reforms and modernization programs all descended in vain as they were met by clerical opposition and the conservative reaction to his Western innovations exploded into a rebellion in 1928 which led to his abdication of power and exile in 1929 and brought the Saqaoists into power.  During the short space of nine months the Saqaoists spread devastation and ruin all over the country: “trade and agriculture were badly crippled, people half starving and diseased and many dressed in rags with their skin showing through the rents and imploring for food, villages deserted, housed burnt, thousands of people rendered homeless, schools and colleges entirely closed, some of them burnt and demolished”.[ii]

 

On the accession of King Nadir Shah (1929-1933) - the man who defeated the Saqaoists - the country’s economy was literally defunct.  

 It was the first case of a national exchequer being absolutely bankrupt, unlined with even a silver coin.... It was literally the case of a monarch ruling at Kabul without possessing so much as even the price of a meal for himself [Maxwell J. Fry, The Afghan Economy, 1974]. 

 It took nearly two years and an army of 40,000 to pull the country together again. By 1932 schools had reopened,  the few government factories built during the reign of King Amanullah Khan Ghazi were made operational, trade took place between Afghanistan and the British India as well as between Afghanistan and the former Soviet Union. However, the economy still remained basically traditional and no large scale attempts were made either to modernize the agriculture sector or develop the industrial sector till 1956.

 

In 1953 Sardar Mohammad Daud Khan took over as the youngest and most energetic Prime Minister Afghanistan ever had. Daud instigated a guided economic policy for rapid economic growth as a result of which the first five-year plan was launched in 1956 and the second five-year Plan was initiated in 1962. He was successful in instigating foreign  economic competition in Afghanistan so that he could finance his ambitious five-year development plans. During  his administration, Afghanistan received the highest levels of technical assistance on a per capita basis of any country in the world. The bulk of the aid came from the former Soviet Union and the United States.

 

Although Daud Khan’s five-year development plans did produce some positive results, their effects on the population at large were not that significant. Certain aspects of  his  policy could have been instrumental in precluding the rewards of the development plans to reach to the common people.  These may include the centralization of economic activities which had a dampening effect on the embryonic private sector, also, protected from competition, insulated from market forces, staffed and run by civil servants, most public sector enterprises failed to contribute to development; the lack of identification of the public with the Government’s development program; the fascination of the government with large scale projects which often were underutilized -- typically, public industrial enterprises operated at 30 to 40 percent of capacity; the failure of agriculture productivity to rise -- in an agriculture based economy like Afghanistan this acts as a critical constraint to economic development; the lack of incentive for farmers to move from subsistence to cash crop farming largely due to inadequate information , poor transpiration facilities and state control; neglecting to develop the capital market -- in fact there is no greater stimulus to industrial development than credit availability; and finally the failure of the plans to create jobs because the projects were largely capital rather than labor intensive -- thus the benefits that have come from these projects have often made their way out of the country into the hands of those who financed them.

 

Politically, Daud Khan’s rigid policy on Pakhtunistan and his very close relation with the former Soviet Union are believed to have contributed significantly toward the nonsuccess of his development plan. The latter two factors were also instrumental in the downfall of his government in 1963. From 1963 to 1973, Afghanistan witnessed four prime ministers each one with a package for economic development. Their policies to a large extent were identical to one another and different from that of  Daud Khan in the sense that  a mixed economy was their economic philosophy with a strong support for private enterprises and with particular emphasis upon small and short-term agricultural and irrigation projects, establishment of multi-purpose cooperatives, expansion of agriculture credit and establishment of basic power and heavy industries. Other features of their policy statements included balanced regional development and community development programs. If materialized this was the most appropriate development program ever sketched for Afghanistan, however, the political uncertainties during that decade prevented it from becoming -- there is no greater hindrance to economic development than political uncertainty.

 

In 1973, Muhammad Daud Khan overthrew his cousin and brother-in-law King Zahir Shah (1933-1973) with the help of the pro-Soviet communist parties and proclaimed the country a republic and named himself both as the President and Prime Minister of Afghanistan. This was an alarming news for the already fragile private sector and therefore had a deteriorating impact on the private investment and hence on the economy. However,  by 1976 President Daud Khan in a surprising move had started to normalize relationship with Pakistan and tried to shift away from the Soviet sphere of influence. To find a substitute for the development aid of the Soviet Union, he approached the Islamic States  and got an overwhelming positive response. It seemed like  a basic framework for stability in Afghanistan was in making -- this undoubtedly would have moved Afghanistan toward a prosperous country.  These hopes were dashed in April 1978 when some communists generals in the army killed Daud Khan and his family in a coup d’etat and set up a communist regime in Kabul.

 

The new regime rapidly moved toward closer ties with the Soviet Union and adopted radical social and economic measures, including a drastic land reform law that limited an individual’s maximum holding to 15 acres. People in large opposed such reforms which subsequently led to a rebellion and arm resistance. On the pretext to quell the anti-revolutionary resistance the Soviets invaded Afghanistan in 1979. The invasion inflamed the nationalist and Islamic sentiments of the population which led to  a popular uprising and war throughout the country. In response the Soviet troops adopted a policy of ruthless air attacks on towns and villages which turned more than one third of the population into refugees, villages destroyed, farming fields into wasteland. It was estimated that more than half of Afghanistan’s 22,000 farming villages were abandoned because of war and aerial bombing and that only 20 to 25 percent of Afghanistan’s arable land was being cultivated. Livestock breeding also declined dramatically with millions of animals reported to have been killed in the course of the war. Afghanistan’s industrial sector which was never well developed and relied heavily on the processing of produce from the rural sector was as hard hit as agriculture. This marked the beginning of the collapse of the Afghan economy.

 

The Soviet troops stayed in Afghanistan till 1989 and  the communist government in Kabul survived till  April 1992. During that period Afghanistan’s economy increasingly integrated with the Soviet bloc and more dependent upon it with each passing year. By late 1980’s Moscow and the Soviet Central Asian Republics despite their own problems were supplying some US$300 million worth of goods every month to Kabul. There was no major development activities during the course of the communist regime -- the government economic policy was limited to day to day survival. Toward the end of  the communist rule, the one time practiced hard-line Stalinist government took dramatic steps (to survive) by lifting the state monopoly over the import of food and fuel allowing the private entrepreneurs to take over. Afghanistan by now relied on foreign sources for virtually all its food. Afghan traders succeeded in providing Kabul with food and fuel with both paid for in US dollars. Hard currency came largely from the narcotics trade and the sale of weapons -- Afghanistan opium crop by late 1980’s was estimated at 750 tons annually, making it the world’s second-largest producer after Burma. Large amount of hard currency also stemmed from goods coming to Kabul and then smuggled into Pakistan.

 

The communist regime was toppled by the Mujahideen -- the Afghan resistance groups -- in April 1992. However, that only brought more war and devastation as the infighting for controlling the power broke up. The meager infrastructure that once existed in Kabul was demolished or looted and this once civilized and highly cosmopolitan Asian capital became a “cultural wasteland”.  With no electricity almost anywhere in the country all the factories in the country were either destroyed or not working. Schools and colleges were closed and the education in all level came to a standstill; water, power, the telephone system, roads and airports were heavily damaged or completely ravished in the fighting and there was no functioning government apparatus to repair the damage. Moreover, many of the country’s professional - including doctors, mechanics and engineers - fled the country and there was virtually nobody  left in the city qualified to undertake repair of the damaged infrastructure. Kabul’s destruction led Raymond Whitaker to compare it to post-Hitler Berlin[iii]. The Afghan state was divided into several war zones controlled by different warlords. The government in Kabul was barely in contact with the warlords, much less able to exercise any political or economic control. Every region made its own arrangements to feed and supply itself on its own. The lack of legitimate sources of income forced many families to grow poppy or join criminal gangs or local militias to survive. The already enormous trade in smuggled goods was expanded even further and so was the trade in narcotics as each warlord including the government established links with international crime organizations exporting heroin and hashish to the West. Afghanistan’s entire economy in effect was criminalised.

 

The Mujahideen government was ended by the Taliban -- a hard-line student militia -- in September 1996. Although the Taliban restored law and order in most of the country, like the previous warlords they have no economic agenda for Afghanistan and their coming into power led to no revival of the Afghan economy. After their taking over power in Kabul the Taliban’s only focus for the revival of the economy was the Turkmenistan's (over a billion dollar) cross-country gas pipeline project. Taliban’s expectations were four-fold. One that the pipeline would create around 30 to 50 thousand well-paid jobs within the country. Second, the road build along the pipeline (at other’s expense) would serve as trade route between central Asian countries and Pakistan (and Possibly India). Third, once the project was complete, the toll from pumping gas through the pipeline would create steady foreign currency. Forth, once it was there the pipeline also could have been used to pump out the Afghan gas to the foreign markets.

 

If the project were to materialize, it indeed would have brought most if not all of these goodies to the country. However, the project that seemed like a sure things four years ago has reduced to a dead idea now. First, the concern was the infighting in the North of Afghanistan through which the pipeline had to stretch. As that concern subsided after the capturing of the area by the Taliban, there came the economic sanctions on Afghanistan of the United States and subsequently of the United Nations in 1999 in response to the Taliban’s sheltering of the alleged terrorist Osama bin Laden. Having no other source of hard cash, Taliban increasingly depended on the narcotics trade to keep them in cash so that they could finance their military activities. It is estimated that over 90% of the Taliban cash resources are spent on financing the war.

 At the time of this update, most of Afghanistan is facing a severe drought. Crops have failed and livestock has been dying as a drought tightens its grip. The opium harvest, the only cash maker both for the Taliban and for the local people, is expected to produce at 50% of the previous year. The reality of reduced opium produce for the current year already hit the Afghan currency hard by making it worthless against other currencies in April 2000 (some argue it became worthless because Russia transported truckloads of into Afghanistan through the apposition held territory). In response, the prices have more than doubled in the first quarter of year 2000 and are still on a steep rise. The Taliban resorted to banning transactions in non-Afghan currency within the country, however, since the currency problem is a symptom rather than the cause of the plight of the Afghan economy the Taliban’s decrees to bolster the Afghani has not (as of yet) and is not expected to have material effect.    

Consequently, at present Afghanistan has no functioning economy. The cities have been virtually destroyed and the country’s infrastructure will have to be rebuilt from the scratch. In most areas, conditions are almost medieval with not a single-operational attributes of a modern state such as roads, electricity, telephones, schools or transport. Most Afghans inside the country are left to subsist on a diet of bread and tea for which they pay astronomical prices. Without an end to the current military conflict between the warring factions the international community refuses to give aid to Afghanistan on a meaningful scale. The only exception is the emergency aid the UN and some Western humanitarian organizations are able to master so that they can relieve acute shortages of food and medical supplies around the country, however, even that is hit hard by donor fatigue. The biggest operation of the UN is the removal of over 10 million mines planted by different warring groups during the course of the 20 years war. Unless there is peace, Afghanistan’s economy will remain as disfigured as it has been for the past 20 years -- particularly past 6 years. Peace and stability alone can bring economic recovery.   

Once peace returns, reconstruction of the war-torn country would be by far the greatest task faced by the post-war planners. Some of the basic questions that need to be answered before the policy makers embark on the formidable job of reconstruction include: Should reconstruction start at the cities or rural areas that make the core of the Afghan economy? Who would finance reconstruction? What projects are reconstruct able or worth reconstructing? What criteria would be used for undertaking  or prioritizing some projects over others? How would the rubble and debris (especially in Kabul) be cleared and who would pay for it? How would resources be allocated among projects? Before and during the war, many cities in Afghanistan were candidates for urban renewal because of unregulated urban growth; is it now possible to engage in urban renewal during reconstruction? The great majority of refugees in Pakistan and Iran as well as the internal refugees living in urban centers were originally from rural areas - will they go back to live in the rural areas after being accustomed to living in cities? How can the exiled professional and technical personnel  whose role would be absolutely pivotal in the reconstruction of the Afghanistan be lured back into the country?  What population density is desirable in the cities and how could that density be obtained and maintained? How are some needs to be weighed against other priorities? What should the planners concentrate on: revitalizing the agricultural economy, exploring natural resources, or industrialization?

 

This is already a long list of questions and it could still be lengthened considerably. If the questions seem overwhelming, so do the variety of answers that can be offered. If the actual physical reconstruction cannot begin due to the lack of peace and stability in the country, at least researching and answering some of these questions would be a remarkable start toward the reconstruction of Afghanistan at this stage.

   

  Bibliography

 [1] Huddleston S. “Europe and Afghanistan”, The New Statesman, 28 January 1928:  485-86.

 [1] Fry Maxwell J. The Afghan Economy, Leiden E.J Brill 1974.

 

[1] Whitaker Raymond, “A city that must die alone”, The Independent, 25 March 1994.