Erik Hancock and Blake Moss
A new effort is underway to bring the benefits of free trade to Afghanistan. Will it work?
Though centered at the heart of the historic silk road trade route, Afghanistan’s landlocked geography, untapped natural resources, and decades of insecurity have hindered economic growth and development. As a result, the potential for a prosperous Afghanistan has not been realized. Due to factors such as a weak private sector, low export capacity, and poor-quality control, Afghanistan has been stuck in a state of volatility and poverty. According to the Observatory of Economic Complexity, in 2016 Afghanistan exported only $1.2 billion, while importing $9 billion worth of goods and services. Although much of this deficit is offset by international donors, Afghanistan remains one of the poorest performers in international trade. This massive trade deficit and low export capacity seriously undermine Afghanistan’s development, particularly as foreign aid support continues to diminish. In response, the European Union, in partnership with the International Trade Centre, has financed the Advancing Afghan Trade intervention to strengthen the Afghan economy, eliminate poverty and improve Afghanistan’s trade deficit.
The Advancing Afghan Trade (AAT) project was launched in November 2016 by the European Union (EU) and the International Trade Center (ITC) in collaboration with the Afghan government. The EU agreed to provide financial support for the project and the ITC, which specializes in trade and development, has pledged to provide technical support The AAT will take close to three years to fully implement and works with the goal of boosting trade capacity, improve job growth, reduce poverty, and help facilitate better regional and international economic relations. Since the launch of the project, the EU and ITC have worked closely with the Afghan government and the private sector, the project’s primary stakeholders. The AAT intervention focuses on increasing exports, improving quality management, and building government capacity. Ultimately, for the project to be deemed a success, Afghanistan must increase its exports.
National Export Strategy
In June of this year, Afghanistan announced the launch of its National Export Strategy, marking the completion of the first phase of the AAT. This strategy is the product of a year-long consultation between the ITC, the Afghan national government, and private sector actors. The NES identifies six commodities that offer comparative advantages and high export potential for Afghanistan: dried fruits and nuts, fresh fruits and vegetables, saffron, marble and granite, carpets, and precious stones. Afghanistan has either a high potential for future growth or internationally recognized expertise in these sectors.
For example, Afghanistan possesses massive reserves of granite and marble, with potential exports valued at 700 million USD. Afghanistan’s mining sector could potentially comprise 45% of GDP by 2024. Likewise, Afghanistan has a reputation as one of the highest quality producers of carpets and saffron in the world, providing the opportunity to improve trade in high-value commodities for which there could be potential demand in markets such as Europe and the United States. In each of these sectors, the NES identifies trade “bottlenecks” and proposes policy solutions that will allow for increased exports
The NES also identifies cross-sector challenges. These include trade facilitation, quality management, skill development, access to finance, and trade information and promotion. Quality management is particularly challenging, especially for Afghanistan’s agricultural commodities. To access more lucrative markets, exporters must have enough understanding of quality and safety standards and must have access to the necessary sanitary certificates, especially for EU and US markets. Because of these and other quality and safety shortcomings, Afghan exporters are chronically rejected from EU and US markets. Though the NES places a great deal of emphasis on improving quality management, Afghanistan’s ability to export agricultural commodities to the US and Europe is questionable at best.
Trade facilitation is another cross-sector issue that represents a significant challenge for Afghan exporters. Though the country acceded to the world trade organization more than two years ago, Afghanistan remains one of the worst countries for businesses. Export costs in Afghanistan are 44% higher than average and export times are 60% higher than average. Indeed, it takes Afghan exporters 86 days to ship their goods abroad, compared to 21 days for Pakistan and 33 days for South Asia. While acknowledging this disparity, the AAT planners seem to believe that full implementation of the World Trade Organization’s Trade Facilitation Agreement will adequately address the trade facilitation challenges facing Afghanistan as they offer no further specific recommendations in the NES.
Afghan exporters must also overcome ineffective financial instruments to enter global markets successfully. Currently, up to 90% of all financing in Afghanistan takes place in the informal sector and come with unnecessary costs and time delays. As a result, small and medium-sized enterprises struggle to access adequate financing. The ITC has committed to exploring the development of financial instruments that are novel for Afghanistan but have a successful record in other Muslim-majority countries.
Capacity building is a major focus of the AAT project and vitally important to the NES. Afghanistan’s limited trade capacity constrains their exports and hinders economic growth. Private sector investment that is necessary for a stable, diversified economy is non-existent because of the numerous security challenges in Afghanistan. The inability to meet quality standards addressing both infrastructure and overall sanitation requirements makes it difficult to attract private investors. Government officials are not aware of potential policy solutions that may increase export capabilities in accordance with international regulations. Due to these constraints on Afghanistan’s trade capacity, the AAT seeks to build policy and trade knowledge among economic officials, promoting regular and comprehensive public-private consultations.
Out of all the capacity building goals put in place by the AAT increasing the knowledge base of government officials and advancing trade facilitation are the most vital to its progress. The importance of informed and educated economic officials within the government is self-evident. The AAT is educating Afghan economic leaders through technical assistance programs developed by the ITC. One technical assistance program initiated in January and February of 2018 was an ITC conference held in New Delhi. ITC flew in Afghan government official, private sector representatives, and notable member of the academic community. These were the first of a series of conferences taking place over the next two years, aimed at increasing cooperation among all of Afghanistan’s economic players, while educating them on how they can best utilize their newfound relationship with WTO. Conferences like these, provide Afghan economic leaders with the education, tools, and relationships necessary to strengthen the private sector and increase trade volume.
Though the AAT program places great emphasis on improved access to international markets, regional trade remains an essential cornerstone of Afghanistan’s trading profile. Indeed, the NES identifies regional trade as a critical factor across a range of issues. Afghanistan has played an important role in several regional infrastructure projects, such as the Lapis Lazuli corridor and the Charbarhar port, which will diversify Afghanistan’s transit routes and improve access to shipping ports. The TAPI ‘Peace’ pipeline also represents an important regional initiative that will provide Afghanistan with $400 million in transit revenue and could open the door to further regional cooperation. Curiously, though, the NES fails to pay much attention to opportunities for additional transit or infrastructure projects in Afghanistan, despite having been identified as an area of potential growth.
Still, the AAT program is already facilitating greater regional integration, cooperation, and dialogue across a range of trade issues, particularly with other emerging markets in central Asia such as Tajikistan and Uzbekistan.
As of this summer, the NES has proceeded through its final approval phase, winning the support of President Ghani. Though the NES takes significant steps towards aligning donors, the government, and the private sector, the implementation and enforcement mechanisms of the AAT project remains overly vague. The government offers no clear path regarding how it will implement and enforce the regulatory and policy changes proposed by the National Export Strategy. In many ways, the NES merely identifies the same challenges and shortfalls uncovered by the World Bank and others in prior research. It is important to recognize that the AAT project is strikingly similar to prior attempts to bolster Afghan trade and that these projects had little real impact on the economy.
Still, this intervention has the potential to be more successful than previous efforts because of the almost unanimous support from both the private sector and government actors. Improving regional infrastructure may provide Afghanistan with new opportunities to enter global markets. The role of the ITC, civil society, and academic think tanks in the project is also significant because these organizations and actors can provide important technical support for a government that may be at a disadvantage in some trade negotiations. The government appears committed to reforming the regulatory environment that is currently hampering Afghanistan’s exports, but whether this produces tangible growth in exports, particularly if the security situation continues to deteriorate, remains undetermined. Persistent insecurity and declining aid threaten any progress that may result from the program.