Afghanistan’s Addiction to Foreign Aid

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Afghanistan’s Addiction to Foreign Aid

Foreign aid has been counterproductive for the country. It’s time for Kabul to wean itself off.

Afghanistan’s Addiction to Foreign Aid

Afghan President Ashraf Ghani gestures during a lecture at Columbia University in New York, March 26, 2015.

Credit: REUTERS/Andrew Kelly

The international community, led by the United States, has appropriated more than $100 billion in aid in the last decade to reconstruct Afghanistan and rebuild its unbalanced economy. While there have been some improvements in GDP growth, life expectancy, poverty reduction, child and maternal health, education, and infrastructure, these improvements are relatively modest in relation to the amount of dollars poured into the country as aid. Moreover, this rate of improvement is too slow for Afghanistan to catch up with the rest of the developing world.

Fifteen years have passed and things don’t seem to have improved much. Afghanistan still ranks third in the world in corruption according to Transparency International, which contributes to its extreme poverty. Although education is more widely available, the quality does not meet world standards. The teaching profession is not attractive because of the low pay. Despite improvements in the health sector, health indicators still remain below the average for low income countries. Agriculture—the second largest contributor to GDP growth after services—declined by a projected 2 percent in 2015. Conflicts and a lack of economic opportunities have caused people to flee the country, leading to both capital flight and brain drain. As China, India, and other developing countries are advancing at a rapid rate, Afghanistan, despite the world’s military and financial investment, is being left behind.

Perhaps, for Afghanistan, as a post conflict country, the aid is “too little too soon.” With the government institutions fragile and incapable of handling foreign aid, and with the weak technical capacity, the country is not as yet ready to absorb and spend aid money wisely.

Aid to Afghanistan could have been more useful had it been phased over a decade rather than dumped in a rush, and had it followed the intended pattern of aid leading to investment, investment leading to growth and growth leading to poverty reduction, as was the case with Marshall Plan of the U.S. giving aid money to the Western Europe after World War II. In Afghanistan, unlike the Marshall Plan, foreign money is mainly converted into expenses and no significant amount is invested in the economy, leaving a negative impact on country.

Among the many side effects of aid is the “Dutch Disease”  effect: flooding U.S. dollars in billions into Afghanistan, a small open economy, adversely affects the country’s economy in terms of inflation and exports. Foreign currency inflows appreciate Afghan currency, making domestic goods less price competitive on the export market, and preventing exporters from competing. It also kills off domestic demand for Afghan goods, as the goods become more expensive. This causes businesses to close and people to lose their jobs, resulting in increasing poverty. With more poverty, Afghanistan gets more aid money, ending up in a vicious cycle. Furthermore, diverting dollars into the construction sector also draws labor from other productive sectors, such as agriculture, leaving those sectors lagging behind. Most farmers left their farms and moved to cities to work for construction companies as gatekeepers or cooks and thus contributed to the country’s dependency on neighbors for food staples.

Much of the corruption in Afghanistan also stems from an inflow of aid money, giving the country one of the worst reputations in the world—British Prime Minister David Cameron recently called the country “fantastically corrupt.” Aid is flowing in without question and mostly goes into the pockets of corrupt officials in a system that lacks accountability.  As Peter Bauer, the famed development economist, has rightly said, foreign aid is “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.” Corruption is especially prevalent in construction and logistics, where most of the aid money is diverted. This doesn’t mean that other sectors are safe; corruption in procurement contracts in the Ministry of Defense and the Ministry of Education’s “ghost schools” are also striking.

Beyond fostering corruption, free money coming into the country in the form of aid kills entrepreneurship. According to World Bank, Afghanistan ranks 177th in terms of regulation quality and efficiency for investment, with no improvements during the past year. The number of new firm registrations in 2015 remains well below that of 2012-13. This shows the difficulties in launching new businesses in Afghanistan. The fact that the country has made no improvements over the past 15 years shows that the government is not interested in creating jobs—or creating systems for entrepreneurships. The reason is that government officials do not rely on taxes to stay in office—they rely on aid. Taxation can help put pressure on government and only then will people be able to hold officials accountable for the loss of their taxes.

Foreign aid also causes the Afghan government to underperform. Even in the best case scenario, when there is no corruption, aid money is spent in providing public goods including healthcare, infrastructure, security, and education. Afghans elect their leaders in a democratic process to provide public goods for them; there is no point in elections if these goods are provided by foreign money. Furthermore, mismanaged aid, hinders democracy in Afghanistan. Because they are so dependent on foreign aid, politicians in Afghanistan spend much of their time courting and catering to international donors, rather than to their constituents. Donors, not citizens, determine the future direction of the country, as the conditionality of aid gives donors the control over the use and direction of their funds. Afghanistan’s aid dependency is having negative consequences not only economically, but politically too.

Most of the aid money is only flowing into the country at the state level, where it is converted to expenses rather than savings. There is no burgeoning private sector where people can accumulate wealth or simply find jobs. As a result, there are constantly factions, most of them from the previous administration, trying to overthrow the government so that they can sit in power and capture the wealth which is coming into Afghanistan in the form of aid. This contributes to political uncertainty and finally to insecurity which, in turn, undermines private sector confidence and adversely affects economic activities in the country.

No single country in history has achieved long term economic growth by aid, yet Kabul still insists on asking for more aid money. China, for example, pulled more than 680 million people out of poverty in from 1981 to 2010, without asking for foreign aid. Although there is scientific debate in economic literature on whether aid does more harm than good to poor countries, in the case of Afghanistan it is clear that aid won’t help in achieving long-term sustainable economic development. There is very little work done with foreign aid money for the poor; the main beneficiaries are development workers and top-ranking government officials roaming the city capitals with their armored SUVs. There’s little tangible impact of their work on the ground.

To improve foreign aid effectiveness, some changes in policies, which directly or indirectly promote corruption or hinder the development process, are required. But aid can’t be an instrument for development per se. The current trend is based on an ugly equation: the poorer the country, the more aid it will receive. This has to change. Donors should help Afghanistan based on the progress it makes toward development. This will provide an incentive for Afghanistan to go forward to catch up with the rest of the developing world. Targeting aid at sustainable growth rather than at photogenic social priorities, coupled with a strong monitoring system to fight corruption, will also help in effectiveness of aid. To prevent aid money from leaving the country, the international community needs to bring some changes in their banking systems and start treating money with unknown sources the same way as they treat money linked to terrorism. The bigger burden, of course, lies on the shoulders of Afghan government: to reform the system, increase accountability, and provide a suitable environment for investments. Although President Ashraf Ghani has made some efforts to fight corruption in the country to convince donors, there is still a long way to go for Afghanistan. These efforts can push Afghanistan with momentum for the short term.

The long term solution for Kabul will involve trade, Foreign Direct Investment (FDI), microfinance, savings, and taxes—the instruments that the developed world uses to finance economic development and job creation. The Afghan government should work closely with the rest of the world, especially its neighbors, to open their doors for Afghan goods. The government can also simplify legal procedures and other policies to facilitate entry for new businesses and support both domestic and foreign investment. FDI will bring in new technologies and new managerial skills, and help in creating jobs and capacity building. Innovations in microfinance to encourage small-scale entrepreneurs by providing support and opportunities can also help in economic growth. A simple example, among many, to follow is KIVA, a non-profit online platform where entrepreneurs are registered and people can choose borrowers, lend them as much as $25, and get repaid. All these and other alternatives can help Afghanistan converge with the rest of the world and reach a sustainable development stage.

Instead of trying hard to convince the world to provide more aid money, Kabul should focus on a proper exit strategy and feasible alternatives for sustainable development. Tax payers in the developed world will not be willing to pay for Afghanistan’s expenses forever.

Mohammad Samim worked for the Afghan government for six years. He is currently a Fulbright scholar and a graduate student at Auburn University.