Jake Cusack and Erik Malmstrom
Ewing Marion Kauffman Foundation
Headlines paint a bleak picture of Afghanistan. Among a host of seemingly intractable problems, the country faces rising insecurity, endemic corruption, and a struggling international effort. Many see significant cause for concern and little reason for hope. Yet as the United States, its NATO allies, and its partners in Afghanistan grapple to build a foundation for that country's long-term stability, there is potential for positive change within an area often neglected in the public discourse: the private sector.
During last year's review of U.S. policy in Afghanistan, the debate centered on the merits of a counterterrorism (CT) relative to a counterinsurgency (COIN) strategy. CT proponents emphasized the use of military force to disrupt, dismantle, and defeat Al-Qaeda in Afghanistan and Pakistan. In contrast, COIN advocates placed greater emphasis on political, diplomatic, and economic elements of power. Underlying this debate were questions surrounding the efficacy and utility of nonmilitary levers of U.S. power in Afghanistan.
While the relationship between economic growth and security is complex, private-sector development undoubtedly will be critical to the long-term viability of the Afghan state. By capitalizing on opportunities ranging from agriculture and mining to manufacturing and services, business growth can provide desperately needed tax revenue to a country that receives more U.S. official development assistance than any other country in the world. It also can drive job creation and income growth for a population that is concerned as much about unemployment and poverty as security.
In the post-Taliban era, efforts to develop Afghanistan's private sector have been inadequate. From an extremely low baseline after decades of war, Afghanistan's gross domestic product (GDP) has more than tripled in less than a decade. Afghanistan also has made progress building critical infrastructure, such as road and telecommunication networks, and in providing basic services, such as health care and education. Despite these gains, in 2010, the country derived 40 percent of GDP from official development assistance, registered
an annual trade deficit of more than $4 billion, and ranked at the bottom of the World Bank's Ease of Doing Business index in most categories. All too often, aid dollars have benefitted foreign contractors and Afghan elites at the expense of the population.
Disproportionate attention to military and political lines of operation compared to economic considerations has contributed to this situation. Even within the economic realm, private-sector development has been a second-tier priority, as direct support for business development has represented a very small share of U.S. assistance to Afghanistan.
In response, critics have challenged the international community's approach to economic development in Afghanistan. In turn, they have advocated a model that emphasizes private-sector growth driven by entrepreneurship. According to this line of thinking, entrepreneurship can be an engine of growth, jobs, goods, services, and tax revenue, while growing "a class of people with a vested interest in stability and order."
In order for entrepreneurship to take root in Afghanistan and other post-conflict societies, proponents emphasize the need for a number of fundamental shifts: accepting capitalism even when it appears chaotic; encouraging economic activity outside of the government's and international community's control; valuing dynamism in development rather than mere stability; involving successful entrepreneurs and investors in economic planning; and treating economic growth as an integral, not secondary, goal of stabilization and reconstruction strategy. Centralized, heavy-handed government planning and activity can have a greater marginal impact in poor countries than in advanced economies, but should not be seen as the only or even the best option.
This work builds on related studies of entrepreneurship in the developing world, which show that the incidence of entrepreneurship is twice as high in emerging markets as in the developed world. They cite talent migration, a pent-up supply of entrepreneurs, and lower seed-capital requirements as key drivers of these trends. Moreover, they emphasize the role that
these companies play in generating jobs, income, and wealth, creating industries, satisfying domestic demand, and opening export markets.
To inform the debate about how best to develop Afghanistan's private sector, the authors of this report conducted more than 130 interviews with businesses and economic stakeholders in the Afghan cities of Kabul, Kandahar, Jalalabad, Mazar-e-Sharif and Herat. To better gain perspective from the people who matter most—the Afghans themselves—we traveled without security and maintained no organizational affiliation. Our goal was to understand the narratives, challenges, and opportunities of Afghan businesses in order to inform a more effective strategy to empower them. Our study aims to complement quantitative business surveys conducted by the World Bank and the Center for International Private Enterprise (CIPE) with qualitative research. Our desire to conduct this study stems from our experience as combat veterans of Afghanistan and Iraq, where we saw firsthand the importance of investing in the long-term economic growth and human potential of those societies.
We argue that there is tremendous potential to nurture a vibrant private sector in Afghanistan. In order to realize this potential, the Afghan government must address key obstacles to business growth, principally security, corruption, access to capital, infrastructure, and policies, rules, and regulations. Meanwhile, the international community must support the Afghan government in these efforts while reforming several components of its own efforts relating to its leadership, human capital, accountability, sector prioritization, and time horizons. While the substance of this report is broadly echoed in our November 2010 policy brief published by the Center for a New American Security (CNAS), we undertake a more thorough examination here.
Section II addresses the implications of key obstacles to Afghan businesses. Section III highlights strategies that Afghan businesses implement to adapt to this highly distorted environment. Section IV examines five sectors of the economy through specific company profiles. The final section provides recommendations for those attempting to enable private sector development in Afghanistan.
It is necessary to establish what this paper will not do. Although we interviewed donors and officials from the U.S. Agency for International
Development (USAID) in every major region of the country, we do not provide a comprehensive evaluation of international programs. Rather, we describe their most salient shortcomings and successes as identified by international development officers and Afghans themselves. Additionally, we draw on extensive work by many before us in writing about these issues. It is our hope that our recommendations lead to a renewed focus on private-sector development in Afghanistan.