Afghanistan’s Parallel Economy

Skaven Blight

4/14/04

The Upside Down World News

A quick assessment of the two disparate economies driving Afghanistan’s Reconstruction process depicts an unsettling future for its neighbors and most importantly for its people. At the Afghan High Level Strategic Forum in Brussels, on the 17th of March, 2003, Finance Minister (FM) Dr. Ghani discussed alternative paths Afghanistan can potentially take during the reconstruction process. The likelihood of these possibilities was contingent upon the level of concerted international assistance in the rehabilitation of the country’s public and private sectors. Among the possible alternatives FM Dr. Ghani mentioned that:

Afghanistan could become a narco-mafia state. Criminal syndicates would take over the mining, oil, and gas industries, as the drug trade expanded throughout the region. Three hundred people would be extremely wealthy, and the rest would languish in poverty with no human rights. Rather than genuine security forces, Afghanistan would have militias serving mafias to guard (and fight over) mines, gas, and oil fields, and drug-trading routes. Its impoverished and desperate people would provide recruits to militias of all sorts.

This alternative would seem highly unlikely. There is, for example, a modicum of an international military presence on the ground to prevent a resurgence of the Taleban or other terrorist groups in the country. The international military presence also serves to prevent the fledgling Afghan state from devolving into another anarchic region fought over and controlled by warlords.

However recent political events and economic trends have shown that FM Ghani’s third alternative is not as unlikely as it may first seem. Currently the international community is attempting to demilitarize the militia system and rehabilitate both the private and public sector of Afghanistan. None of these three initiatives will be successful unless the international community reshapes the dominant economic system that currently powers the Afghan economy. Politely it is referred to as the ‘parallel economy’, however in reality it is more readily recognized as a ‘war economy’. The private militias and both the private and public sector are heavily implicated in the parallel economy. The parallel economy is structured around a number of narco-mafia networks. Unless these networks can be exchanged for legitimate forms of economic commerce, militia units and the private and public sector will have a continued interest in maintaining arrangements that leads to weak state institutions and power.

Seeing as how one of the primary goals of the reconstruction process is to build an effective central Afghan governmental authority should the international community fail to act and address the parallel economy, they will fail in realizing one of the most important reconstruction goals. They will also fail on their promise to deliver a better future for the Afghan people. Dismantling the parallel economy will take considerable effort on the part of the international community. The comparative financial advantages the parallel economy has over the foreign funded reconstruction effort are staggering. The below details the discrepancies between the two different economies that are currently ‘operable’ in Afghanistan today.

The Foreign Funded Economy

In January of 2002 donor countries meeting in Tokyo pledged $4.5 billion in aid over the course of four years. That allocates for Afghanistan approximately $1.125 billion per year for the next four years. The Afghan Assistance Coordination Authority (AACA) states that as of the 15th of May, 2003, out of a total $2.6 billion ‘committed’ to the reconstruction, $2.1 billion has actually been disbursed. That amount is further broken down after factoring in immediate humanitarian expenditures. Actual available reconstruction funds totals $1.6 billion as of the 15th of May 2003. It should be noted that the term “disbursed” means that a donor has transferred a certain amount of pledged funds to an account accessible to an implementing agency. It is then up to that agency to utilize that money in the field, on actual reconstruction projects.

Though $947 million has been disbursed, as of May 15th, 2003, only $192 million has been spent on reconstruction projects that have been completed. These delays in directing donor funding to the transitional government and the various actors involved in the reconstruction effort has created a number of problems that stand to threaten reconstruction efforts in the country.

For the transitional government lack of adequate funding has prevented it from reforming a number of important ministries, paying the salaries of its civil servants and implementing projects of its own that would strengthen the public sector. This has discredited it in some circles of public opinion. NGOs have been constrained by the limited funds available to them. Much of their initial expenditures go to startup and overhead costs, without access to a larger pool of resources they cannot begin the projects they were originally intended to implement. This has resulted in feelings of resentment amongst many Afghans, who perceive NGOs as wasteful organizations who do nothing to reconstruct the country and do everything to take up reconstruction resources that would be otherwise coming to them.

Another important issue is equity in terms of the dispersion of reconstruction efforts. To date most reconstruction efforts have focused on a few specific urban areas, such as Kabul and Bamiyan. Security problems in the southeast of the country has meant that it has largely fallen out of purvey of the ongoing reconstruction effort. This has resulted in fueling resentment towards the new central government.
Also, the international community is increasingly being perceived as indifferent to the suffering of the Afghans. The Pashtuns, the country’s largest ethnic group, particularly feels abandoned and marginalized by the international community and the central government.

The Parallel Economy

With the outbreak of war in 1972 and the loss of the countryside to the rebels, an opportunity to capitalize on the lack of a legal authority within the country was seized by a number of different parties. Criminal elements, private citizens and guerrilla fighters quickly took advantage of the regulatory gap in the countryside. Opium production, smuggling, the reselling of military weapons and hardware acquired as either spoils of war or through the ISI, CIA and other sources all came to prominence during this period.

Events in the surrounding region also encouraged certain trends. Iran,
Pakistan and Turkey began enforcing strict bans and severe punitive laws in order to control and bring to heel the drug economies operating within their states. Opium growers in Afghanistan suddenly had a vast market advantage along with increased profits due to the lack of other competitors and produce within the illegal drug business of the region. Through the 80s this system was consolidated and institutionalized. It was also expanded to include certain functions that the state had formerly provided.

Guerrilla factions quickly organized mechanisms that allowed them to collect customs revenues, exploit minerals and natural resources, divert humanitarian aid and impose ‘security’ taxes on the towns, villages and regions under their control. By the time the Soviets had withdrawn and Great Power aid to the competing guerrilla factions had been reduced, the parallel economy had by then been well developed and commandeered by powerful guerrilla factions. All the above industries, drug cultivation and smuggling, arms smuggling, general smuggling activities became all the more important to fuel the war effort of those factions involved in the resulting civil strife. These industries have persisted following the fall of the Taleban in 2001.

As of January 2002 the total income drawn in by the parallel economy is no less than three-fold larger than that of the foreign funded economy. The cultivation of opium and cannabis, the production of heroin, the smuggling of arms and general goods have contributed significantly to the country’s overall GDP. By some accounts the contribution of opium cultivation alone totals 17% of Afghanistan’s GDP. That does not include the trafficking of opium or the production and sale of heroin. The total contribution of the parallel economy could actually be much higher than above figure indicates.

In many respects the title of ‘parallel economy’ is a misnomer when it comes to describing these economic activities. They now make up the backbone of the Afghan economy. Those that makeup the labor force of the parallel economy are for the most part not ‘greedy war entrepreneurs’, the majority are motivated by basic survival strategies. Most are motivated by the need to acquire adequate enough funds to feed, cloth and shelter their families against the uncertainties that ‘parallel economy’ itself produces.

The parallel economy is also changing over the course of time, and a number of noticeable transformations have taken place within it. Most ominously, opium cultivation is now being coupled with heroin production, a process that had previously taken place in laboratories outside of Afghanistan. Since 1999 there has been a steady increase in the ratio of heroin to other types of drug products seized by countries adjacent to Afghanistan. As of 2001 heroin accounted for 44% of all seizures, a 12% increase over 2000.

Production of heroin requires a good deal of inputs and organizational structure. This would imply that the drug industry within the country is becoming increasingly sophisticated and coordinated. This would also imply that domestic consumption of heroin will also increase as the product becomes more readily available in local markets. Recent evidence supports both suppositions. For example, heroin laboratories can now be found in most poppy growing areas, they are very prominent in the northeast part of the country. As a result of the increased domestic production of heroin, drug addiction rates have also begun to rise. The problem is deepening in the northeast as more people become exposed to the heroin manufactured in the laboratories located there.

Conclusions: Part I

In the short-term there are many reasons to believe that a number of related industries within the parallel economy will continue to expand. The continued monetization of the economy means that there will continue to be a greater incentive to maximize cash returns for produce as a number of sectors within the economy continue to see gradual price inflation. Opium or heroin producing towns, villages and regions will continue to flood locale markets with cash that they receive for the sale of their drug crops; usually US dollars, and drive up prices for basic goods.

Farmers and laborers outside of the parallel economy will face increasing incentives to join the parallel economy in order to regain lost purchasing power. Additionally continued high sale prices for opium cultivation will create a high incentive for more farmers to switch from cash crops to drug cultivation. Even low-end prices ($350 per kg of raw opium) far outweigh the benefits that come with legitimate farming occupations. Recent trends support this hypothesis. Farmers have begun to increasingly cutback on total hectares of farmland formerly allocated for cash crops and plant poppy flowers instead. As the UNODC’s recent paper on the topic suggests:

‘The increase in gross income from poppy cultivation in 2002 was mainly due to higher yields, which increased by more than 80% in 2002, reflecting the shift back to cultivation on irrigated land. Opium poppy prices rose by 10% as compared to a year earlier. [At these gross income levels no other crop which could be planted on a large scale would be competitive vis-à-vis opium poppy in Afghanistan.]’
(UNODC, 104)

There are reasons to believe that in some locations of the country, such as Badakshan, the problem is so severe that many locals refuse to work with NGO’s or assist in implementing their community projects. There is simply too much incentive to switch to opium cultivation. For example, many locales in villages around Badakshan were once happy to engage in Food-For-Work programs, however, as of 2003 there are no longer any applicants whatsoever to such programs. Long-term solutions to the problem are not on the horizon. With military intervention by ISAF and the US having been ruled out as a possibility to solving the problem some have proposed a number of economic mechanisms and enticements to wean Afghan farmers off opium.

However, none of those proposals are sustainable on a long-term basis and could actually deepen the problem. For example there have been a number of initiatives proposed by the British government. Some of these initiatives advocate purchasing the opium crops themselves, others advocate purchasing wheat at prices competitive with opium. However most of these programs are not sustainable on a long-term basis and could result in ‘hostage’ situations where the interested parties are forced to continually allocate substantial resources to the program lest the farmers return to opium cultivation. These dilemmas are illustrative of the hurdles facing any economic program aimed at combating the Afghan drug trade.

In the long-term the parallel economy could have disastrous affects for
Afghanistan and the international community. A parallel economy does not produce any real, licit goods and does not readily promote investment into industry or infrastructure needed to rehabilitate a war torn state and strengthen the licit economy. Instead much of the capital is sequestered into bank accounts outside of the country in places like Pakistan or Dubai and much of it is spent on conspicuous consumption. New mansions currently under construction in Feyzabad, the capital of Badakhshan, are illustrative of where some of the profits made from the parallel economy end up. In the long-term the vast majority of Afghans stand to lose out in the parallel economy.

However, bad as the parallel economy may be for the Afghan people and the reconstruction of the country in the long run, there are great incentives for war entrepreneurs to perpetuate the parallel economy. The parallel economy since its development in the early 80s functions as the primary power source of the warlords and militia units throughout the country. This is evidenced by a resurgence of fighting in certain regions of the country as warlords fight among each other for control of different features of the parallel economy.

Licit crops, drugs, smuggling routes and the few industrial assets left in the country are all open game for war entrepreneurs with enough guns and men to control them. Recent fighting in the Sholgarah valley between Gen. Ostad Atta Muhammad and Gen. Abdul Rashid Dostum over crop taxes and drug smuggling routes highlight some of the more visible features of the parallel economy in operation. Throughout the country there are both warlords and lower-level commanders who continue to support, protect and ultimately profit off the parallel economy. The parallel economy is also instrumental in supporting the war machine of both the warlords and the lower-level commanders. Through liquid funds accrued through the parallel economy warlords are able to maintain or call upon large militias to wage war or defend territories against rivals. Lower-level commanders are in turn able to coerce the local populace into paying a number of taxes on goods that the parallel economy supports.

Parties to the parallel economy have a great interest in strictly limiting the ability of any centralized authority to circumscribe the parallel economy. This interest runs throughout all levels of the parallel economy, from the rank and file laborers who cultivate the poppy or manufacture the heroin to the warlords who ensure the maintenance of the parallel economy and the expansion of it. It most readily manifested in the division of the country into a variety of spheres of power, each sphere headed by a prominent war entrepreneur, some of whom control high level posts in the transitional government. These war entrepreneurs have craved out mini-states for themselves in the regions that they control. None of them have anything to gain from submitting to the transitional government and have much to lose in the way of power and wealth. To date, war entrepreneurs have been largely uncooperative in taking steps to give up authority to the transitional government.

In summary, the parallel economy promotes relationships of power and violence that create strong incentives for war entrepreneurs to cultivate enough instability needed to prevent the creation of a centralized authority and a lasting peace.

Conclusions: Part II

Supposedly the donor aid pledged at the Tokyo conference is meant to contribute to the reconstruction of Afghanistan. The reconstruction aims at assisting the central government in building the various institutional capacities necessary for a nation-state to function. Ministries have been reorganized and streamlined, the military has undergone important changes and some parts of the country are beginning to see donor aid begin to arrive in the form of community and regional reconstruction projects. There have been some successes; however the two disparate economic forces driving Afghanistan’s economy do not mutually compliment each other.

The parallel economy works against a number of important goals that reconstruction aid is meant to fulfill, such as the creation of a functioning central authority. As long as the parallel economy remains operable there will be strong incentives for many actors to slow down or outright curtail the reconstruction effort. As of the end of 2003 it is clear that donor aid efforts are being counterattacked by an economy premised upon systemic violence and instability. The parallel economy empowers regional warlords to resist the efforts of the central government in bringing a sense of normalcy and law to the country. It also continues to function as a very important source of funding for terrorists in their ongoing campaign to disrupt the reconstruction effort.

In order to effectively combat the parallel economy the actors with stakes in the reconstruction process must quickly formulate and agree upon an aggressive strategy that specifically addresses and seeks out solutions towards ending the parallel economy. Such a strategy needs to combine coercive measures for non-compliance with an aid policy that generates real alternative livelihoods and incentives outside of parallel economy activities. Such a strategy would also ultimately need to allocate a greater amount of funds for the overarching reconstruction effort. To date the total of reconstruction disbursements per year as of the 2002 Tokyo conference totals to no more than 1/3 of the money generated by the parallel economy. Most jobs in the licit economy earn about 120% less than jobs in the parallel economy.

There are therefore currently few incentives for anyone to forgo commercial arrangements that directly work against the formation of centralized authority and the reconstruction effort. The current donor program simply does not provide enough to restructure the Afghan economic system so as to check the parallel economy. Much of the reconstruction money has been spent on the rehabilitation of Kabul, immediate humanitarian relief measures and in building up the operational strength of NGO’s involved in the reconstruction process.

Very little donor aid has been spent on the rest of the country, for most Afghans noticeably little has changed in their lives over the past two years. The southeast has been prevented from enjoying the benefits of the reconstruction process due to the deplorable security situation there. The worsening security situation in the southeast also assures that there will be little will on the part of the international community to expand much needed reconstruction activities to this part of the country. These regions are prime locations where the parallel economy can entrench itself, and in the case of the southeast it has done so. Solving the problems in such places requires more than military activity, it requires a new development agenda which faces up to the daunting task of taking on Afghanistan’s lucrative and destructive war economy.

Copyright © 2004, The Upside Down World news

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