PRESENTATION TO THE INTERNATIONAL CONSULTING ECONOMISTS’ ASSOCIATION

January 29th 2003

Reconstruction and Development in Afghanistan –

An Overview and Review of Opportunities for Economic Consultants

This text summarises an informal talk that was given by Mark Watson, an independent consulting economist and project/programme designer, who has been working in Afghanistan. The views expressed in this text are given in an entirely personal capacity. Mark Watson may be contacted by e-mail at the following address:

1.Introduction

I was very pleased to have this opportunity to discuss Afghanistan with you:

  • It is a fascinating if challenging country, currently at a watershed;
  • It offers an environment that requires radical solutions, where incremental tinkering will not suffice;
  • It has a number of inspirational leaders, who are prepared to enter dialogue and to act by making key policy decisions;
  • The infrastructure and institutions of Government at both central and provincial level require investment, reform and renewal;
  • Social indicators are very poor, as is the status of girls and women, improvements are needed in a form that is socially acceptable and does not overtly challenge the status quo;
  • Whilst accepting the need for sensitivity, quick wins are needed to bring real benefits to a population that has suffered immeasurably from 23 years of civil war, anguish, social and economic dislocation;
  • A sustainable framework has to be place that addresses key challenges of sustainable development, poverty alleviation and acute environmental degradation;
  • The interplay between the Government, the UN Agencies and the donor community provides a fascinating and evolving theatre. We move from act to act, unsure whether or when the interval will occur. Far less the final curtain!
  • There is some considerable satisfaction in contributing in some way to the drama. I feel fortunate and privileged to have had the opportunity to do so, and hope that many of you will likewise have that opportunity. There is much to be done, in a variety of roles and activities.

I would like to take this opportunity to thank the Committee, and you as members of ICEA, for disrupting the usual time-keeping. I was in Kabul on 8th January when this meeting would normally have taken place. I hope that compressing the timescale of this meeting and the February meeting will not overload the digestive system of members.

I would like to stress that although I have been working with the Afghan Assistance Coordination Authority (AACA), I am here in a private capacity. My comments are personal and in no way represent the official position of the Government or of any members of the Government, its advisers or other stakeholders.

Let me structure the talk as follows:

i)I’ll give a very short introduction to the political milestones in the reconstruction process. Many of you will in any event be familiar with these because they have received considerable publicity;

ii)I will highlight some of the key implications of this environment on the reconstruction programme;

iii)I will seek to provide an overview of how the different stakeholders – the Government of Afghanistan, the UN agencies and the donors - have and are addressing these challenges. This will include the Government’s identification of key priority projects, the role of the UN’s TAPA fund-raising, and the “light-touch” approach of the donors, now being challenged by the demands of moving towards a Consultative Group process in which many donors have been asked to play key roles as “focal points”;

iv)I’ll stick my neck out with some predictions for the future. However given the multitude of uncertainties please don’t use these predictions for investing “widows and orphans” funds on the back of these predictions;

v)I will seek to say a little about the specific opportunities that may be available to members of the ICEA to work in and for Afghanistan’s recovery programme; and finally:

vi) I will pose a few broader development questions and issues that may be pertinent and/or have application outside the country.

2.Political Framework

Others will have a deeper understanding of this than me, but it is generally considered that there are four key milestones in the reconstruction process:

  • The Bonn Agreement of November 2002, a mere 15 months ago, which set a framework for stable Government;
  • The Tokyo Conference, in January 2003, at which donors pledged their support to the Islamic Transitional Administration;
  • The Loya Jirga of June 2002, a gathering of the clans, which consolidated the Bonn agreement and confirmed Hamid Karzai as President and Dr Ashraf Ghani as the Minister of Finance;
  • The two-year transitional phase to elections, to be held in (or is it by?) June 2004. A mere 17 months away, and not long in terms of consolidating the rule of a central Government and of bringing real benefits to the people.

There are other significant milestones including:

  • A conference in Oslo in December 2002, at which the UN Agencies presented their portfolio of projects for funding. Funding which it is understood exceeded the sum requested by some 50%!
  • Less positively, the day in September 2002 in a would-be assassin shot at the President, missing him by inches, and within hours a large bomb was let off in Kabul, killing over 20. That day reminded us the relative fragility of the peace, and the extent to which we are dependent on a relatively small number of truly inspirational leaders within Afghanistan.

What are the underlying realities of the political environment?

The first and most obvious point is that relative peace and positive reconstruction can only take place with the support of the vast majority of the population.

Given a life expectancy in the early to mid-40’s, and given 23 years of fighting, a high proportion of the population has no memory of peace. Allegiances in many cases rest with warlords, many of whom have a specific geographic and/or ethnic mandate. The political process has to be inclusive, and must include elements who might not be considered ideal candidates for the parish council, elections, far less reconstruction of a war-ravaged country of high geo-political significance.

A consequence of this is that there is a large Cabinet and over 30 Ministries. This is too many for optimal economic governance, but is vital, at least in the short term, to ensure an adequate degree of buy-in at a political level. Often roles between individual Ministries are not well defined, and are continuing to evolve. Making things work, in terms of results-orientated actions, and with respect to effective sectoral planning can be very difficult.

Imaginative solutions, best practice in terms of stakeholder involvement and careful institutional capacity building measures are required. Unfortunately such improvements are often time-consuming and run contrary to the pressing need to provide quick wins and generate benefits for the population. It is suffice to say at this stage that there is an inherent tension between the need to get things done and the need to be inclusive, and at times it is possible to feel that we are falling between the two stools in our haste to make things happen.

Provincial Equity: A second consequence is that the relationship between the centre (to the extent that Kabul can be described as the centre, it certainly is not in geographic terms!) and the provinces is very important. Central Government can only succeed in unifying the country if it manages to provide some sort of spatial or equity balance. At present there are some serious gaps in administrative coverage, the most acute of which is Herat, where the formidable Ismail Khan, is running what is in effect a local fiefdom. In part he is able to do so because he collects a high share of Government customs duties, reflecting the strategic significance of Herat, as a gateway to/from Iran. It is of course very far from Kabul. It is, by all accounts, a striking city where many civic activities function well. Some would say that in its state of relative autonomy it is perhaps functioning too well!

The size and effectiveness of public administration: Civil service reform must be on the agenda for any country that is moving from a command type, centrally planned economy (and the Russians left their mark in more ways than one!). The Afghan civil service has very large numbers of employees, although precise numbers are hard to confirm. It is clear that over-staffing is pervasive, and productivity is not assisted by the minimal expenditure available for non-wage recurrent and investment expenditure. A mere six months ago some Ministries had no computers at all, and very little capacity to deliver “outputs”, however they are defined. Wage levels are appallingly low, with many workers paid only some US$30 per month, a sum that could not support a family, especially in a harsh environment with extreme winters.

Yet the usual solution of massive retrenchment does not seem to be a short-term option. There are no safety nets, and with so many of the population, especially former militia, already looking for work, nobody wants to add to that burden. The current strategy is to seek to re-vitalize the private sector, with the hope that in time it will take up some of the slack. Of course Afghanistan has comparative advantages – it is a shame that the prime export-generating crop, fetching premium prices, has to be the poppy!

The imperative to generate jobs: It is not surprising in the light of these circumstances that considerable effort has gone into labour-intensive works, creating employment in simple reconstruction such as building culverts, retaining walls and similar public works projects. These are managed by the equivalent of a prime contractor such as UNOPS and Habitat, and generally use local NGO’s for supervision and disbursement. We don’t have time to discuss the multitude of NGO’s in Afghanistan: some are excellent whilst others act like private contractors who have no intention of ever paying taxes.

As the reconstruction programme progresses it is expected that the initial “food for work” type programmes will be phased out and the rural economy will become fully monetized. To date, a depressingly high share of donor expenditures has been in the form of food aid – vital to ward off starvation in the drought, but not providing a long- term solution to the development needs of Afghanistan.

Early Policy Actions Of Government

The Government is extraordinarily fortunate in having an especially gifted Minister of Finance, Dr Ashraf Ghani. A social anthropologist by discipline, he became a Professor of a leading American University and chief social development adviser in the World Bank. He has contributed to a number of major projects in such controversial areas as dam resettlement programmes, and also contributed to the restructuring of the World Bank initiated by Wolfensden. He has thus seen the inside of the largest international development bank from the inside, warts and all. You can’t pull the wool over Dr Ghani’s eyes!

An early policy action, was the drafting of the National Development Framework, a high-level policy document that set a vision for a private sector led development strategy with strong sectoral vision. It was produced at short notice in time for the first “Implementation Group” (IG) meeting of donors in March 2002. Given the speed with which it was produced, it is not a perfect document, it is a little uneven, for example not giving gender issues the attention they deserve in Afghanistan. It was also not possible, given the speed with which it was produced, to consult widely at the time although it has now been translated to both Pashtu and Dari, and is reaching a broader audience. None the less it is a visionary document, and brought home to many donors that Afghanistan is not like Bosnia. It is not a situation that can be ruled direct by outsiders.

The implications of this cannot be over-stressed. Until the transition Government was formed, the UN was effectively in charge. The modus operandi of most UN agencies reflected their gruelling experience of working during the Taliban era. Most tried to minimize their exposure to Government and were, and to some extent still are, deeply distrustful of its motives. Something of a power struggle has emerged. The Government believes, with a good degree of justification, that it is competing for the same aid resources as the UN agencies. Many of these agencies do excellent work – nobody would dispute the need for UNICEF to implement immunisation programmes in a country where infant mortality is one of the highest in the world.

Others however, in a cash strapped world, seem to see Afghanistan as a cash cow, to be taken for all it is worth. Overheads are on occasion excessive, and “mission creep” seems to be the order of the day. One organisation proposed a US$30m schools building programme, despite having no track record in large-scale building of schools. Another wanted to construct a large printing press - something that might more appropriately be handled by the private sector. The Government wants UN agencies to focus principally on humanitarian and not reconstruction activities, and to compete as a supplier of services. No more monopolies, and much greater transparency! This is highly desirable, but hardly popular amongst the agencies. Creating a new ethos is bound to also create resistance and resentment from some quarters.

Establishing the Financial and Managerial Credibility of Government: Given the initial scepticism about the capacity of Government to manage its own affairs, it was very important to establish a track record for accountability. The Government made the first steps in this direction with grant support from the World Bank. It contracted recognised international firms to provide assistance with:

  • The establishment of accounting systems, appointing Bearing Point (formerly KPMG consulting) to introduce a computerized general ledger system, Free balance;
  • It appointed Crown Agents to undertake all major Government (including most donor funded – World Bank, ADB and EU) procurement;
  • It appointed Pannell Kerr Forster (PKF) to provide audit support, in the form of strengthening Government audit processes.

It furthermore stated that all Government books are open for inspection: donors and others are welcome to inspect them at leisure.

A deepening of the process is proposed with a major “Financial Strengthening Project”, for which expressions of interest have recently been sought. This will place up to 10 internationally recruited Chief Financial Officers in key spending Ministries to facilitate budget preparation and undertake expenditure monitoring.

The Government has been making a plea for direct financial support through the Government financial system. So far this route has received only modest sums, although as confidence builds this may change. A more successful route to date has been the Afghanistan Reconstruction Trust Fund (ARTF) administered by the World Bank, to which donors have contributed more than US$100million and which should process some US$200million within its first year.

It is relatively early days but there are grounds for thinking that clearer boundaries will need to be set about the degree of control exerted by the World Bank Administrators of this Trust Fund. Certainly the Bank has fiduciary responsibilities to ensure appropriate use of the cash moving through the Fund, but this does not extend to micro-management. At the end of the day if the Government is not allowed to develop its own prioritisation and management capabilities then it cannot succeed. It is in the interests of us all, including the Bank, that it should succeed.

The Government took another key step in exerting authority with the highly successful Currency Conversion process. Until recently warlords and others were issuing/ printing Afghanis. As might be expected this resulted in rapid depreciation. DAB, the Central Bank, had no means of knowing what the money supply was and by September 2002 the rate had depreciated to approximately Afghanis 60,000 to US$1.00. Since the largest note in circulation was Afghanis 10,000, it made even hard-pressed consulting economists feel quite flush as we put a slab of notes in our pocket. The new Afghani is worth 1000 times the old one, and the modern smaller security-printed notes have been welcomed by most parts of society. The conversion process was a major challenge, as the number of old notes submitted for transfer was about 50% greater than estimated. Last week a huge fire was still blazing at the back of the Ministry of Finance, as the last notes were burned, adding to Kabul’s already noxious air. Overall, however, the conversion process has been a great confidence booster and since conversion the new Afghani has been trading at a stable level of about Afghani 47 to US$1.00. Providing the Central Bank keeps to a stable money supply, prospects for the new currency should be good. It is worth adding that Afghanistan is very much a cash economy so leave your plastic cards at home.

The next financial challenge is to broaden the Government’s own revenue base – currently a very modest US$80 million or less than 20% of recurrent expenditure. Customs reform will be one key platform for this but other fiscal initiatives are also under consideration.