Saving Afghanistan’s Economy: The 1818 Model

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Saving Afghanistan’s Economy: The 1818 Model

The early U.S. experience may offer an idea for avoiding the crash that looks likely in Afghanistan post-2014.

Panic would be an understatement. Land values and home prices were down 50%, key financial prices hit 25% in a single day, and banks began to foreclose on heavily mortgaged properties.

The financial crisis of 2008? No, in fact we’re talking about the first modern financial crisis to hit the United States, way back in 1818-1819. If we’re lucky, that difficult period could provide a blueprint for how to pull out of the nose-dive that looks increasingly likely to be the trajectory of the Afghanistan economy after 2014.

The early financial history of the United States reads like a playbook of things to avoid: an experimental central bank with almost no accountability, regional banks with even less oversight of their own back-room currency printing presses, and an easy credit mentality driven by the new national pastime of Western expansionism. This heady mix of credit and confidence exacerbated a boom and bust cycle that would last until well after the American Civil War.

Many of these booms and busts in early U.S. history can be attributed to the emergence of the agricultural futures markets in Chicago, the use of leverage in those markets, and the ability of banks to use local harvests as a source of credit in the form of new loans without centralized control. This newly created credit exacerbated price volatility around harvest times, which was made even worse by leveraged commodity speculation. The frequent outcome was widespread bank failure.

As complex and obscure as this picture seems, it does offer one gem of an idea with direct applicability to Afghanistan: the use of agriculture as a source of credit and as a way to increase food security locally.

Afghanistan’s economy is largely dependent on agriculture and so its economic output often swings wildly year-to-year. What is perhaps less quantifiable but no less important is the emotional impact those swings have not just on economic output but on the stark choices faced by Afghan families when times are very bad and the limited opportunities available when times are good.

One possible solution aimed at reducing uncertainty is to establish a new system of agricultural districts across the country. Within these districts nationally owned grain storage facilities could be built to secure and audit locally grown yet farmer-owned staple crops. Each large district, ultimately as many as 10 or 12 across the country, would give farmers low-cost storage, could link individual identification of what they own to the national ID card in development, and might offer the capacity to either sell a portion of their crops to government-sponsored programs or save for future shortages to feed their own families. It’s the farmer’s asset and their choice.

Most importantly, the central bank of Afghanistan under its mandate to promote sustainable economic growth could issue a new type of regional currency backed by the value of the grain in storage. This new currency would not replace the existing Afghani and would be issued only in small bills, be legal only in that agricultural district, be issued with an expiration date, and be supplied directly to the farmer in some fractional amount to what they leave on store.

After the expiration date, that local currency would be returned to the regional center within a small window of time, hopefully after changing hands many times, and converted into the next series of local bills printed by DA Afghanistan Bank.

To be clear, the central bank would not use grain stores as a basis to increase national money supply and debase existing currency; rather, it would use a locally produced product as a store of value to create local, legal tender in some small fractional amount against what is secure within auditable state-owned grain storage facilities.

Regional currency in small bills with an expiration date will effectively eliminate the motivation for counterfeiting. On the other hand, there would undoubtedly be a cost involved in monitoring the program. Nonetheless, in a country where access to as little as 3000 Afghani, just over $50, can make the difference between a hungry family or having a little cash to plan for the month or next growing season, that seems like a reasonable cost to shoulder.

Ideas like this one get at the heart of a problem that has so many negative outcomes: uncertain futures breed poverty and will perpetually limit a family’s ability to feed and educate their children. In Afghanistan, these adverse choices hit women and girls particularly hard, mostly in the lack of education opportunities and almost universally in the rural areas. The cycle of uncertainty, poverty, lack of food security all in turn feed the demand for illicit opium production, provide a home to the insurgency, and increase the cost of progress in a country that desperately needs it.

The availability of this local currency, no matter how limited, would provide some certainty and the secure grain stores would provide a safety net in a country that often oscillates between feast and famine. More importantly, it would give individual families hope for the future and some capacity to plan. It is easy to talk about “Afghanistan” after 2014 but perhaps not so easy to understand that we are really just talking about a collection of thousands of families who have the same fears any of us might have for our own families: How do I eat and how do I stay safe? Unless we can provide the complex kit of economic and social tools to answer this basic question, the international community’s expenditure of blood and treasure will rapidly become an unfortunate footnote in the history of a country facing an increasingly dire outlook after 2014.

Christian H. Cooper is a fixed income trader working on ways to create the structures and new financial instruments needed to transparently and responsibly advance development in Afghanistan and in MENA at large. He is a Truman National Security Fellow and a Term Member at the Council on Foreign Relations.