Endangered Livelihoods: Questions of Opium and Integration for the Afghan Economy

Instead of eradicating the crop, opium can be made a legal livelihood for Afghans. Afghan economy is in dire need to be prepared for global integration.

Policy Perspectives , Special Issue Afghanistan, 2008

Abstract

Introduction

Afghanistan is an extremely poor, landlocked country, highly dependent on farming and rearing of livestock, primarily, sheep and goats. It has long been one of the poorest countries in the world, falling near the bottom on the scale of average per capita income and on the United Nations Development Program (UNDP) human development index. Prior to the conflict that beset the country in the late 1970s, the Afghan economy was characterized by food self-sufficiency, predominance of agricultural exports, macroeconomic stability, a free-floating exchange rate, and low debt burden. During the conflict, a third of the population fled the country, with Pakistan and Iran sheltering a combined peak of more than 6 million refugees. Nearly three decades of war and conflict have devastated the economy by destroying infrastructure, weakening institutions and civil society, and interrupting productive activities. The majority of the population continues to suffer from insufficient food, clothing, housing, and medical care.

These problems are compounded by the absence or weakness of the institutional infrastructure required for the proper functioning of the economy, which is both an indirect result of war, i.e. neglect and under funding, and a direct result of conflict. The seriousness of this problem is not always obvious at first sight. As Robert Burke of the United States Agency for International Development (USAID) said, people look at the bombed-out buildings, but not at the bombed-out institutions.

Among the few regular and sustainable sources of livelihoods in Afghanistan is opium production, which accounts directly and indirectly for nearly half of economic output in the country. Since opium production currently feeds almost entirely into narcotics trafficking, which in turn is perceived as the financial supply line of the Taliban, all Western donors who are currently providing assistance for Afghanistan’s reconstruction process insist that opium production be eradicated as part and parcel of reconstruction efforts. However, this position overlooks the option of legitimate and formal production of opium, which may very profitably be exported to foreign markets, such as pharmaceutical industries, and serve as the foundation of Afghanistan’s own industrial sector in the future. Moreover, it ignores the fact that the value of opium production for the Afghan economy not only exceeds the value of assistance being offered by donors on an annual basis, but has also been locally sustainable through the worst times the country has seen. It would therefore appear that simply eradicating the poppy crop from Afghanistan would be devastating for the country’s economy, especially if no viable alternative livelihood options are established during the reconstruction process.

This paper argues that, since the global demand for opium derivatives is much higher than Afghanistan’s capacity to produce it for medicinal purposes alone, and given the importance of opium production in the Afghan economy, opium should be considered an economic resource for sustainable growth of the country as well as a rare medicinal resource. If produced legally, this crop could become Afghanistan’s major legitimate export product.

This issue assumes further urgency in light of the fact that Afghanistan aspires to gain accession to the World Trade Organization (WTO) by as early as 2010. While WTO membership will help integrate Afghanistan with the global economy, it is imperative that, before it puts itself in the position where it must comply with WTO requirements, Afghanistan assess the positive potentials for its economy in legitimate and formal opium production and trade, and reverse international opinion against this critical sector of its economy.

Economic Conditions

Afghanistan is in the midst of a major transition from a war-ravaged economy to one based on market principles. This process will take years to accomplish. In most of Afghanistan, the rule of law has never been strong, but after 28 years of warfare, it has been replaced almost completely by a ‘rule of the gun.’ In most of the country, regional power holders—whether they hold official positions or not — exercise political, police, and judicial authority through their militia forces. Their activities are financed by profits from production and trafficking of opium, and through their control of roadblocks on transportation routes at which they exact ‘taxes’ on travelers and commodities. This time is critical in determining whether Afghanistan will continue its slow progress towards representative government, the rule of law, and a responsible role in the international community, or lose ground and slide back into political and religious extremism and economic chaos. The short-term priorities of the Afghan government are focused on basic elements of governance, including security and services.

Since the fall of the Taliban regime, Afghanistan has been heavily dependent on the donor assistance being provided to help it out of turmoil through a reconstruction process that includes physical, political and economic activities to eliminate security concerns. External funding has had a transforming effect on the Afghan economy. The availability of large sums of money and other resources with limited accountability has led to a rapid monetization of the economy and the development of criminalized transborder networks involved in the arms trade, smuggling and money laundering.

After six years of Hamid Karzai’s government and international presence, the economic scenario in Afghanistan remains dismal. Although economic figures depicting rise in growth rate are quoted, they do not portray the real picture of the country’s economy. These sketchy figures suggest that economic growth in Afghanistan did not lead to development in the past six years.

Table 1 shows the recent economic indicators of Afghanistan.

Table 1

Economic Indicators for Afghanistan

Source: Asian Development Bank 2007.

The Afghan economy has shown mixed trends since 2002. The real value of non-drug growth has varied from 28 percent in 2002 to 10 percent in 2007. Consumer prices have improved and inflation has been brought down considerably, while the exchange rate has remained stable. The trade deficit is registered at around $3 billion — a major chunk of GDP. Despite economic growth, political economy reforms and state building efforts, revenue collection as a percentage of GDP is poor. This is largely because the formal taxable economy accounts only for roughly 10 percent of all productivity, while 80–90 percent of economic activity in Afghanistan occurs in the informal sector, which, though largely responsible for the recent economic recovery and dynamism, remains outside the reach of the state taxation system.

Since the government is entirely dependent on international assistance and aid for its functioning, socioeconomic indicators have improved to a marginal extent. However, the level of employment and provision of fundamentals like education, health, housing, and clean water remain alarmingly low. Kabul has the highest urbanization rate in the region because it is the primary destination of refugees and provides relatively better security than the rest of the country.

Despite improvement in some economic indicators, the incidence of poverty remains very high with almost half of population living below the poverty line. Employment opportunities exist only in a few sectors, like construction and trade financed by drug profits. Access to social services remains limited and live expectancy is very low. Child and maternal mortality rates are one of the highest in the world.

The Significance of Opium

Importantly, opium dominates by contributing 40–50 percent to the economy. Narcotic trafficking is a major source of revenue. Almost half of the economy is informal and based on the opium and drug trade, although farmers receive very little on opium produce. Most of the money goes to the drug producers and sellers and not the farmers who cultivate poppy. Accounting for one-half to three-fifths of Afghanistan’s GDP, this vital cash crop has also become a source of corruption by the international drug mafia. As Afghanistan’s only major export, opiates play a significant role in enabling the country to finance the non-drug trade deficit while maintaining price stability and the value of the currency.

Today, Afghanistan is the largest producer of opium in the world. Between 1990 and 2007, its opium production increased steadily — except for a period during the Taliban regime — from 1,570 tons in 1990 to 6,000 tons in 2006 and 8,200 tons in 2007. Over the same period, Afghanistan’s share of world supplies of opium increased from 42 percent in 1990 to 87 percent in 2005 and, finally, 93 percent in 2007. Since 2001, poppy cultivation in Afghanistan has increased from 8,000 hectares to 193,000 hectares.

Several factors have contributed to this rapid growth in opium production, including favorable cultivation conditions, high morphine content, insecurity and institutional weaknesses, poor infrastructure and rural poverty. The country faced the combined challenges of resurgent militancy, factional conflict, and rampant narcotics production. Throughout the country, there was a near-explosion in the cultivation of poppy. Despite the favorable environment for expansion of opium poppy cultivation, however, opium remains a relatively minor crop in terms of area under cultivation, accounting for only around 4.27 percent of total national agricultural land. It is found to varying degrees in all of the country’s 34 provinces.

Illegal production of drugs and narcotics trafficking are considered a source of insecurity by donors, as it is perceived that the Taliban are using drug money to finance their arms supplies and pay guerilla fighters. This sphere is therefore identified as a cross cutting issue to be countered as an essential part of all reconstruction activities. However, as opium is the only regular and sustainable source of revenue for the Afghan economy, a wiser strategy would be to integrate it in the licit agricultural, economic and trade activity of Afghanistan.

Drugs are defined as substances used in medicine either externally or internally for curing, alleviating, or preventing a disease or deficiency. However, in the context of Afghanistan, the term opium is used interchangeably with “drug abuse,” which is unfair because opium, the juice in the unripe seed pods of the opium poppy, is an ethical drug that can be used when medically prescribed according to the Food and Drug Administration (FDA) of USA. Indeed, morphine, a principal derivative of opium, is amongst medically effective substances that are widely used scientifically. Given intravenously, morphine is still considered a very effective drug for the relief of pain, and is used medicinally for severe pain, cough suppression, and sometimes before surgery.

The global demand for opium derivatives is much higher than Afghanistan’s capacity to produce it for medicinal purposes alone. Research has indicated that “in more than 150 countries, containing about 80% of the world’s population, only a tiny minority of the patients in need of morphine treatment actually receives this morphine” . Therefore, it is important at this point in time for Afghanistan’s opium produce to be defined and treated at par with similar products of other countries like India, Turkey and most of Latin America. The medicinal and health value of Afghanistan’s opium needs to be recognized and its supply channeled through legal mechanisms.

Sustainability Concerns

Since the economy is heavily reliant on foreign assistance, the government’s fiscal and debt policies are hostage to donors’ interests. However, to achieve sustainable growth and development, Afghanistan needs to look into options that best serve its own economic interest.

Sustainability was defined in the Brundtland Report as “Meeting the needs of the present generation without compromising the ability of future generations to meet their needs.” Afghanistan presently confronts multifaceted challenges to the sustainability of its economic and natural resources. Some of the major issues include unexploded artillery and landmines and their collateral impact; drought, deforestation, overgrazing, and desertification; and an influx of returning refugees and internally displaced population which has created fresh problems of sanitation, contaminated water and soil erosion. Environmental awareness in society at large is non-existent. Since Afghan society is primarily agrarian, environmental concerns may be expected to be prominent in economic policy; however, they receive only limited consideration and are not reflected in the institutional framework.

Despite the ongoing reform process, the revenue collection, budget deficit and international reliance depict a gloomy picture. The population’s capacity to pay taxes is still very low. Operational costs are skyrocketing and poverty has been constantly rising.

The share of the opium sector in the overall Afghan economy has declined steadily over the last few years. However, this mostly reflects growth in the licit economy due to international military presence rather than a decline in exports of illegal drugs, as these exports have remained largely unchanged. Although data are limited, Afghanistan has a highly unusual trade structure: exports are dominated by illicit narcotics (opium and its products, morphine and heroin), with an estimated total value of $2.7–2.8 billion per year, and unofficial re-exports into neighboring countries. The country is highly import-dependent for basic goods like petroleum products, construction materials, machinery and equipment, medicines, textiles and, in bad harvest years, food. Imports are financed largely by aid and, to a considerable extent, drug proceeds. By contrast, officially recorded exports are only in the range of several hundred million dollars.

Since opium revenues are the only regular and sustainable source of the Afghan economy, this product will inevitably have to be integrated into the licit agriculture, economic and trade activity of Afghanistan. Transitions bring a massive change in the conduct of society, and can modify professions and skills according to the new economic compulsions and global market mechanisms and obligations. Therefore, the Afghan government, with donor assistance, should be working towards adjustments in the pattern of production, especially for the opium crop, and facilitating the global demand for this rare commodity through WTO mechanisms. This will not only facilitate looking in to policy directions but also in sustaining the domestic product and revenues.

Role of Donors in Afghanistan’s Reconstruction

The objective of donor assistance to Afghanistan is to help the country out of turmoil through a reconstruction process that includes physical, political and economic activities to eliminate security concerns. As mentioned earlier, donors believe that the Taliban are using earnings from illegal drug production and narcotics trafficking to finance their arms supplies and guerilla fighters. This sphere is therefore identified as a cross cutting security issue to be countered as an essential part of all reconstruction activities.

The first donors’ conference on Afghanistan was held in Tokyo in January 2002. Here, $5.25 billion were pledged for Afghan reconstruction over a period of five years, i.e. 2002–2006; however, the World Bank estimated that $10–12 billion dollars would be needed over this period. A comparison of the average per capita level of aid distribution in several post-conflict settings further illustrates the discrepancy between the needs of Afghanistan and the response of the international community. In Rwanda, Bosnia, Kosovo, and East Timor, an average of $250 per person per year of aid was donated. In contrast, the international community had pledged $42 per person per year of aid to Afghanistan over a period of five years.

Notwithstanding the deficiencies in commitments by the international community, the conclusion of the Afghan presidential and parliamentary elections and the inaugural session of the Afghan National Assembly in December 2005 marked the formal completion of the Bonn Process. At the fourth international conference on Afghanistan since the fall of the Taliban, i.e. the London Conference of January 2006 hosted by the United Kingdom and co-chaired by the Afghan government, the United Kingdom and the United Nations (UN) established further plans for reconstruction and development in Afghanistan. This agreement between the Afghan government and the international community led by the UN is known as the “Afghanistan Compact.” As part of the reconstruction process, the Interim Afghanistan National Development Strategy (I-ANDS) and the National Drug Control Strategy were also launched at the same conference.

The Afghanistan Compact provides the framework for international engagement in Afghanistan for the next five years (2006–2011), setting outcomes, benchmarks and mutual obligations that aim to ensure greater coherence of effort between the Afghan government and the international community. The Compact supports I-ANDS, which lays out the Afghan government’s vision and investment priorities, and reflects a process of national consultation underpinning the benchmarks in the Compact and the targets set in Afghanistan’s Millennium Development Goals. Under the Compact, a new mechanism called the Joint Coordination and Monitoring Board (JCMB) has also been created to ensure coordinated international engagement in Afghanistan.

Given the resolute plans of the Compact, the London Conference also generated pledges of more than $10.5 billion over the next five years. The United States was the biggest donor with $4 billion, while the UK committed to provide $900 million during the next three years. On January 26, 2006, the Bush administration announced it would ask Congress for an additional $10.6 billion in aid for Afghanistan, $9 billion of which would go to security assistance. Besides, there was another significant pledge from Russia, showing willingness to write off Afghanistan’s $10-billion debt to the former Soviet Union.

The UN had sought to limit its involvement in Afghanistan in order to encourage Afghans to assume responsibility for their own political reconciliation and economic reconstruction. As part of this approach, certain donors took on “lead nation” responsibility for assistance to particular sectors. This “light footprint” approach, however, had to some extent been reflected in the nature of the international community’s involvement in Afghanistan more generally. Despite initial promises of billions of dollars in foreign largesse and a rhetorical commitment not to neglect Afghanistan again, international assistance has been characterized by a relatively light wallet.

The international community has failed to adequately address the financial needs of the war-ravaged country: Afghanistan needs approximately $4.5 billion per year to meet the ambitious agenda of London Compact, which means that even if the aid committed by the donors is used at its full potential, without any spillage, only 50 percent of the Compact’s targets would be met. The most likely scenario is that about 25 percent of the targets set in I-ANDS will be achieved.

On the other hand, the pledges made by the donors, to be dispersed on a year-to-year basis, do not even cover the yearly average amounts that are generated from opium production. In other words, the much higher and sustained revenues generated by opium production have far more potential to improve livelihoods and raise employment in Afghanistan than the promises made by donors. It is therefore highly unlikely that the ambitious agenda of providing alternative livelihoods to Afghan farmers will be achieved in the next five years. Thus, Afghanistan finds itself at the center of a vicious circle without comprehensive international investment in the development of its economy, i.e., transportation, industry and agriculture. In 2004, former Finance Minister Ashraf Ghani Ahmadzai estimated that “Afghanistan must attract $15 billion in foreign private sector investment to create a modern economy. Moreover, Afghanistan will need $28 billion to $30 billion in foreign aid and private investment over the next six years to rebuild roads, schools and hospitals, and on and on.”

Agriculture sector holds a lot of potential in Afghanistan’s reconstruction. There could be good prospects in the joint formation with neighboring countries of bilateral and multilateral agricultural holding companies specializing in fur and other livestock products, cotton, fruit and vegetables, and fruit and vegetable processing. This would offer Afghan farmers an additional and stable source of income from world markets.

WTO and Afghanistan

Afghanistan faces multifaceted challenges in its transition to reconstruction and development. The major challenge is to establish incentives and an institutional structure for a private sector-led market economy. This will provide impetus to trade activities at the global level. Almost every nation aspires to create a modern and effective economy and to participate equally in world trade strives for WTO membership, and Afghanistan is no exception. The country renewed its request for WTO membership and was granted observer status in 2004.

However, globalization has a great impact on every country and affects most of its people, especially the poor and disadvantaged. When governments come under pressure from global forces, their social and economic development strategies often cease to be people-centered and are no longer developed with active participation of the people affected. One of the major issues associated with WTO is its regulatory mechanism reduces the ability of member states to devise their own development strategies and policies according to their specific realities. This feature has the potential to put the sovereignty of a state in jeopardy. Moreover, it has become quite obvious that developed countries do not follow the recipes that they prescribe to the rest of the world; there is more self-interest in the WTO mechanism than shared interest. However, while there is no denying that global bodies are frequently biased in favor of the West, staying away from them or participating half-heartedly also serves no purpose. A more realistic approach is to participate actively and make one’s views and position heard. Afghanistan would therefore need to be well aware of where its own interests lie and to assert itself in their favor when it joins WTO.

Afghanistan is committed to a diversified economy and promotion of labor-intensive, export-oriented manufacturing. However, immense challenges lie in the way of this goal. At present, imports far outstrip exports, and a huge trade deficit of $2.69 billion, equivalent to 45 percent of the country’s GDP, was posted in 2004/05. Domestic producers struggle to navigate the difficult investment climate in Afghanistan and to compete with the cheap imports that dominate the market. Afghanistan currently has a small share of overall regional trade, and non-opium trade accounts form only some six percent of the Afghan economy at present (see Tables 1 and 2). Moreover, liberalization of foreign trade in Afghanistan is limited only to the extent of certain initiatives and ideas; an open and transparent environment for foreign trade is lacking. There is no physical infrastructure to handle the customs and border transactions. Transit and customs procedures and documents are yet to be streamlined to match the needs of trading partners and the country will not gain accession to WTO until 2010.

Any effort to liberalize the economy and stabilize the current Afghan state needs to take a number of key requirements into consideration. First, the effort must be undertaken within a regional context. Secondly, it should be workable in the very long term. Finally, it should cater to the interests of Afghanistan, even where these interests conflict with donors’ interests.

Opium production is a key area where interests conflict. Western policy is currently dedicated to destroying opium, the life line of the Afghan economy, which is difficult to regard as being in Afghan national interest, at least in the short to medium term. Not only is the compensation offered inadequate, but the realities on the ground also indicate that the vast majority of the compensation will never reach the Afghan farmers, and a great deal of it will be recycled back to Western banks by the Afghan governing elite. This would be contrary to the country’s national interest, harming Afghan farmers in particular and generally setting back Afghan commercial networks.

Another point of divergence in interests concerns Iran: the Afghan leadership recognizes that recovery and stability will involve a relationship with Iran, to which donors, especially the United States, are generally opposed. The development of economic links with its neighboring countries should be seen as a priority in Afghanistan’s recovery process. Afghanistan remains as isolated from the regional economic system as in the past. Trade between Afghanistan and its five immediate neighbors — Iran, Pakistan, Uzbekistan, Turkmenistan and Tajikistan — amounted to only about 8 percent of its total foreign trade in 2004, which was a significant reduction from the proportion of 11 percent that had been achieved as recently as in 2002. However, international aid is not focused on this vital element. Regional cooperation is even more important for Afghanistan as it is land-locked country.

Afghanistan’s accession to WTO needs special consideration by the donors in light of the unique conditions of the country. A report issued by Oxfam suggests that “Liberalizing the Afghan economy too soon could undermine vital efforts to reduce poverty and suffering. Afghanistan must avoid the onerous obligations imposed on other very poor countries when they joined the WTO, including Cambodia and Nepal.” It further proposes that Afghanistan demonstrates the urgent need for reform of the WTO accession process for the poorest countries, to prioritize their development and give them substantial and lasting preferential treatment. The accession deal should reflect the development needs of Afghanistan, not the demands of existing WTO members. The report also says that Afghanistan needs special measures to ensure that it retains a significant proportion of the benefits of a more open foreign investment regime. The country must not be pressured to liberalize its essential services sectors too quickly, or be required to reform its legal structures without careful consideration. Besides, more aid and technical assistance must be provided to assess the potential impact of accession on vulnerable sectors of the economy.

Conclusion

Afghanistan’s accession to WTO is important to link its economy with the global trade mechanism. However, it may not be advisable at this point in time when proper institutional infrastructure has not been put in place in the country. Among the basic prerequisites for accession is the recognition of Afghan opium produce as legitimate at the global level. Opium is the only sustained product of the country, which has survived the long period of turmoil. There is a need to identify the difference between the agriculture product, legal drug, narcotic and illicit drugs. Products in the legal category should be given due emphasis and converted into relevant legal downstream industry, whereas the illegal category of drugs should be discouraged by eliminating the drug mafia rather than eradicating opium. Revival of the agriculture sector and growth of industry and services will be heavily dependent on the revenues generated by opium.

Moreover, the prospects for making decisive progress in restoring Afghanistan’s agricultural and industrial sectors lie to a great extent in stimulation of Afghanistan’s cooperation with neighboring countries. The present weakness of economic links in the region, however, prevents this. Although international aid has contributed to road construction, prospects for agricultural and industrial reconstruction in Afghanistan remain uncertain.

Instead of rushing towards WTO membership, Afghanistan should first develop its trade institutions; establish and enact laws, rules and procedures for a vibrant trade sector that can sustain growth and facilitate the transit towards development; and establish a trade promotion agency, responsible for identifying foreign markets, introducing domestic products and markets, and shaping the formal mechanism for the export of Afghan opium to legitimate foreign buyers.

In addition, in coordination with the Ministry of Finance and foreign partners, prospects of establishing pharmaceutical industries producing drugs and medicine based on opium and opiates should be evaluated. This will help in attracting foreign direct investment, promoting employment in industry as well as agriculture, generating revenues for the government and, most importantly, eliminating the drug mafia in Afghanistan.

No progress in the economic, political or social conduct of Afghanistan can be sustained unless the main agriculture produce of the country, opium, is incorporated in the reconstruction process. Therefore, any national or international proposal for the eradication of opium should strongly be disapproved.

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