Despite eleven years of foreign led reconstruction efforts, Afghanistan’s economy is still struggling. As of 2012, 35% of Afghans are unemployed, and 36% of Afghans live below the poverty line, which are some of the highest statistics in the world. With a labor force of 15 million, Afghanistan has plenty of human capital to contribute to its society. However, since 36% of Afghans live below the poverty line, foreign assistance is necessary to provide a stepping stone for utilizing this human capital. Pumping money into Afghanistan for the last decade has only been a band-aid solution to help Afghans on a day to day basis. To have a long term solution for a stable Afghanistan, the international community, particularly foreign companies, must directly invest in the country because it will economically benefit Afghanistan and dissuade Afghans from joining the Taliban.
What is Foreign Direct Investment?
According to the Organization for Economic Cooperation and Development (OECD), foreign direct investment (FDI) is a type of investment with the objective of establishing a lasting interest by a resident enterprise (direct investor) from one economy in an enterprise (direct investment) that is in an economy other than that of the direct investor. Put more simply, FDI is when an individual or enterprise from one country invests in the economy of another country.
The Benefits of Inward FDI
FDI has many benefits for the host country. According to Prakash Loungani, Assistant to the Director in the International Monetary Fund’s External Relations Department,
FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market. Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. Profits generated by FDI contribute to corporate tax revenues in the host country.
According to Karl Sauvant, Chief of the International Investment, Transnationals and Technology Flows Branch of the United Nations Conference on Trade and Development,
Not only can FDI add to investible resources and capital formation, but, perhaps more important, it is also a means of transferring production technology, innovative capacity, and organizational and managerial practices between locations, as well as of accessing international marketing networks.
According to Barry Bosworth and Susan Collins’ study in “Capital Flows to Developing Economies: Implications for Saving and Investment,” FDI has highly beneficial effects on domestic investment. In fact, for every dollar in foreign investment, there is a dollar invested by someone at the domestic level as well. FDI helps increase domestic investment.
Furthermore, FDI leads to job creation. According to a report by the OECD, multinational corporations alone employ “73 million workers, representing 3% of the global workforce” in countries around the world.
FDI also leads to higher wages in countries. When a foreign firm creates high-quality jobs that offer good pay and working conditions, other companies in the host country must compete and offer similar incentives to attract workers. This influence leads to the country offering competitive salaries for workers.
All things considered, FDI is a vital component to the reconstruction of Afghanistan because it has the potential to contribute to a flourishing economy. It can create jobs, increase wages and investments made by domestic companies, and lead to Afghanistan obtaining access to innovative technology.
Current Economy of Afghanistan
How Afghans are Making Money
One way Afghans are currently making a living is by participating in the illicit drug trade. In 2011 alone, over 300,000 acres of land in Afghanistan were cultivated to grow opium poppies. The plants are then chemically processed to produce heroin. The amount of opium poppy cultivation in 2011 was up 7% from the previous year. Additionally, the province of Helmand alone provides 40% of the world’s opium poppies. Some estimate these numbers to further rise in the following years because of the high prices of the opium poppy and because of the limited profitability of alternative crops.
Many poor farmers who are unable to make a living as a sharecropper, move out to the desert areas of Afghanistan to grow poppies. Land is cheaper to purchase in the desert, subsequently increasing the farmers’ earnings and allowing them to feed their families. According to Abdul Rauf, a farmer in the desert area of the Nad Ali district, “People are committed to grow poppies, because there aren’t any other crops where we can make enough money to fill our children’s stomachs.” A booming economy with many well paying jobs, however, would prevent Afghans from participating in the illicit drug trade.
Benefits for The Taliban
The poor economy keeps the Taliban in business in a number of ways. First, farmers desiring protection from government officials for their opium poppy farms hire the Taliban to provide them and their farm security. This relationship has in some ways fostered a bond between the Taliban and poppy farmers. According to an elder who lives in Nad Ali,
People who are living in areas where the government has control and where they don’t allow them to grow poppies, they don’t like the ban and they are going to areas where the Taliban have control. There is nothing more important for people than poppies, and there is nothing more productive for people than poppies.
According to the United Nations Drug and Crime Office, the Taliban have also refrained from charging the usual tax based on opium poppy production amounts and are instead charging smaller fees on farmers’ harvests. In turn, the Taliban are able to have an influence in whatever region they provide protection.
The poor economy is one of the reasons why there has been a constant insurgency in Afghanistan. According to NATO commanders, the only way to defeat the insurgency in Afghanistan is to win over the “vast majority” of the Taliban who are motivated by money rather than ideology. Lieutenant-General Sir Graeme Lamb, a former British commander who came out of retirement and is tasked to lure moderate Taliban fighters away from the extreme ones, has said that it would be impossible for coalition forces to fight their way to success and that most Taliban can be persuaded to leave the organization through better employment prospects.
Many unemployed workers are becoming drug addicts, and then turning to work for the Taliban to fund their habits. According to many residents of the province, Maidan Wardak, many educated men go to Iran searching for work because of the lack of jobs in Afghanistan, only to get hooked on drugs from their employers to improve their work efficiency. When they return to Afghanistan, they pass their habit to friends and family. Subsequently, this cycle has increased the number of Taliban fighters who provide drug addicts the income to sustain their drug addiction. Islam Husseini, the Director of the Labour and Social Affairs Department in Maidan Shah, the capital of Maidan Wardak, has complained about the lack of investment in the province and says,
I agree that a lot of our young people are going to neighbouring countries, especially Iran, to look for work. When they come back they are addicted and a danger to other young people. In my opinion the future for the districts and villages will be very bad. I can’t believe that educated people want to join the Taliban, but one thing makes that possible. The reason is that they can’t find work and of course if somebody is unemployed, the enemy will want to use them. Another reason people want to join the Taliban is that there has been no reconstruction in Maidan Wardak. Nobody cares about this province.
More well paying jobs in Afghanistan would prevent unemployed Afghans from turning to drugs and working for the Taliban, contributing to the insurgency.
Foreign Efforts to Stimulate Economy
Many foreign governments are providing financial assistance to Afghanistan in efforts to fix the economy, however, it has been ineffective. Since 2001, Afghanistan has been a top five recipient of Official Development Assistance (ODA), which is a grant or loan from a government source to a developing country for the promotion of economic development and welfare. In just the past three years, it has been the top ODA recipient, yet, high unemployment persists throughout the country.
FDI Levels in Afghanistan
The current levels of inward FDI in Afghanistan are some of the lowest in the world. Below is a chart detailing the amount of FDI in Afghanistan between 2004 and 2008. The levels of FDI in Afghanistan after 2008 are not available because of inconsistencies in data collection.
|Total FDI (USD Millions)||234.81||176.92||409.24||207.36||108.58|
|Number of Foreign Companies||249||379||504||193||291|
The amount of inward FDI to Afghanistan has consistently been among the lowest in the world. Additionally, the decline following 2006 is despite the fact that there was an upward overall trend in FDI for Central Asia. Additionally, according to the United Nations 2010 World Investment Report, the estimated amount of inward FDI in Afghanistan dropped further in 2009 and was at 185 million U.S. Dollars.
To further illustrate the current FDI trends in Afghanistan, below is a chart detailing how much FDI was contributed to each sector of the Afghan economy between 2003 and 2008. “Services” are defined as an intangible commodity such as teaching, “construction” is defined as building or assembling infrastructure, “agriculture” is defined as the cultivation of life forms to sustain life, and “industry” is defined as the manufacturing of a good or service within an economy.
|Percentage of Investment||39%||34%||18%||9%|
As can be seen in the above chart between 2003 and 2008, FDI in Afghanistan had been very limited to only certain sectors of the Afghan economy. Additionally, the sectors of the economy that have FDI are not the most profitable. However, this trend has since changed.
Afghanistan has recently allowed foreign companies to invest in the nation’s vast natural resources. On December 28, 2011, the Afghan government signed a deal with China National Petroleum Corporation, allowing the state owned Chinese company to research oil and natural gas blocks in a couple regions of the country. As part of the agreement, the Afghan government will receive 70% of the profits from the sale of the oil and natural gas, and CNPC will create an oil refinery, the first in Afghanistan. This agreement will not only create jobs and training for Afghans, but will also provide them technology through the creation of the oil refinery. Additionally, this agreement will provide a stepping stone for future investment into the natural resources sector of the Afghan economy.
Openness of Afghanistan to FDI
Afghanistan’s laws provide a welcoming environment for international investments. The 2005 Law on Private Investment specifically prohibits discrimination against foreign investors. Certain investments, such as those in the sectors of non-banking financial activities, insurance, natural resources, and infrastructure are subject to special consideration by the High Commission on Investment (HCI). Additionally, discussions are underway to improve regulations of investments.
Under the Law on Private Investment, foreigners cannot own real estate in Afghanistan, however, investments can be 100 percent foreign-owned through leases for periods of up to 50 years for arable land (land that can be used for growing crops) and longer for non-arable land. The Afghan government has also adopted economic reform programs which heavily rely on foreign experts who base their initiatives on the best international practices. The government has also developed policies to foster investment, including currency reform, rationalized customs tariffs, and a simplified tax code. It has also set up structures to help promote investment and investment-friendly policies.
The Afghanistan Chamber of Commerce and Industries (ACCI) represents the business community to high level government officials and exists to establish a legal framework for private business in Afghanistan. Additionally, it provides a variety of support services to its members. ACCI has established 21 offices in various provinces of Afghanistan. ACCI also has affiliations and partnership agreements with investors in the U.S., Tajikistan, Iran, Pakistan, the United Arab Emirates, and Italy. Finally, ACCI works with many different levels of government, including, but not limited to, parliament, the Office of the President, the Ministries of Finance, Commerce, Interior, Transport, and Justice to encourage investment in Afghanistan.
Afghanistan also has many laws protecting businesses and providing a friendly environment for investors. Major laws that are already in effect cover partnerships, corporations, arbitration, mediation, copyrights, and patents. Furthermore, a new telecommunications law has been approved by the parliament and presidential signature is pending. An Information & Communications Technology law is also under consideration. Laws that will modernize legislation on trademarks, transportation, agency, and competition await the president’s signature. Finally, anti-hoarding and contract laws are under consideration.
Investment in Afghanistan’s Natural Resources
According to a study conducted by the Pentagon, Afghanistan has nearly 1 trillion U.S. Dollars in untapped mineral deposits. The deposits of iron, copper, cobalt, gold, and lithium are large and essential to modern industry, and could transform Afghanistan into one of the most important mining centers in the world. According to an internal Pentagon memo, Afghanistan could become the “Saudi Arabia of lithium,” which is a crucial raw material for batteries in laptops and some mobile phones. General David Petraeus, the former commander of the U.S Central Command has said, “There is stunning potential here. There are a lot of ifs, of course, but I think potentially it is hugely significant.” Additionally, according to Jalil Jumriany, an adviser to the Afghan Minister of Mines, the minerals “will become the backbone of the Afghan economy.”
Ways FDI Can Improve Afghanistan
FDI can help improve Afghanistan’s technology. Studies have shown that newer technologies are transferred from country to country through FDI. This technology transfer can solve a number of issues in Afghanistan. For instance, many farmers in Afghanistan avoid cultivating and selling cotton because the government’s cotton mill is often not working. Subsequently, the price of cotton increases and cannot compete with cheaper Pakistani cotton. Through FDI, a company can come into a local farm, provide the funds to build its own efficient cotton mill, and then receive a certain percentage of the profits.
Through FDI, Afghanistan’s heavy industry can be properly built. In reference to the untapped mineral deposits, according to Paul Brinkley, Deputy Undersecretary of Defense for Business and leader of the Pentagon team that discovered the deposits, “The big question is, can this be developed in a responsible way, in a way that is environmentally and socially responsible? No one knows how this will work.” However, through FDI, multinational corporations with environmentally friendly advanced technology, can share their technology with Afghans.
Investments by foreign companies have already led to massive job growth in Afghanistan. 46% of those employed in Afghanistan between 2004-2008, were hired by foreign companies. The chart below shows how many jobs were created by foreign and domestic companies.
Through further investments, more jobs will be created in Afghanistan.
Positive Changes in Investment Environment of Afghanistan
Afghanistan has previously faced issues that has prevented foreign investors from investing in the country relating to electricity, access to land, corruption, telecommunications, and transportation. However, Afghanistan has addressed every major issue preventing foreign direct investors from investing in the country.
The major issue that has prevented companies from investing in Afghanistan is a lack of electricity. According to the 2005 World Bank report titled, “The Investment Climate in Afghanistan,” 64% of foreign firms in Afghanistan identified electricity as a major constraint for conducting business. In that year, only 9.7% of households had access to local power. However as of 2012, 30% of Afghans have access to electricity. The capital of Afghanistan, Kabul, itself has over 70% of households connected to a power grid. More areas of Afghanistan are gaining access to technology which will help alleviate some of the concerns foreign investors face.
Access to Land
The second major issue that has prevented companies from investing in Afghanistan is having access to land. According to the World Bank report, 60% of foreign firms in Afghanistan identified access to land as a major constraint for conducting business. However, towards the end of that same year, and after the survey was taken, Afghanistan enacted a law allowing foreign investors full access to a wide variety of lands.
The third major issue that has prevented companies from investing in Afghanistan is corruption. According to the World Bank report, over 53% of foreign firms in Afghanistan identified corruption as a major constraint for conducting business. Yu Minghui, a Chinese investor who had hoped to establish a small steel plant and employ 80 Afghans, indicated that relevant Afghan authorities constantly seek bribes. He states, “Even small matters like visa for technicians can be time-consuming, and additional money is sometimes demanded to make the whole process quicker.” Furthermore, bribes are not only required for establishing a business, but also for permits, visas, and gaining access to electricity. In another instance, the formerly government-owned Ghori Cement Factory in Afghanistan was ultimately sold to a firm owned by the brother of Afghan President Hamid Karzai and relatives of other leading Afghan officials. The factory was sold despite the fact that it had not formally been put up for sale. With the outcomes of major economic decisions being made according to political connections and without heed of technical criteria (i.e. qualifications, past track record, proven availability of capital, etc.), foreign firms and investors may decide against competing, and hence investing.
However, much has been done recently to battle corruption. For example, in 2009, Afghanistan’s Minister of Mines was accused by U.S. officials of accepting a $30 million bribe to award China the rights to develop a copper mine. However, the minister was replaced soon after.
The Afghan government has also formalized the Afghanistan Investment Support Agency (AISA) as a governmental body. The agency is responsible for facilitating the registration, licensing, and promotion of all new investments in Afghanistan. The unification of services within this single agency reduces corruption. Investors no longer have to independently seek authorizations, permits, and licenses from a range agencies that may be more susceptible to corruption.
The Afghan government also protects foreign companies from corruption through insurance. After having been approved credit by the World Bank, the Afghanistan Investment Guarantee Facility (AIGF) was established to encourage FDI in Afghanistan by providing political risk insurance with coverage capacity of up to 60 million U.S. Dollars. The risks covered include currency transfer restriction and inconvertibility, expropriation, breach of contract, and war and civil disturbance.
Another major issue that has prevented companies from investing in Afghanistan is a lack of telecommunications. According to the World Bank report, over 26% of foreign firms in Afghanistan identified a lack of communications as a constraint for conducting business. That year, the number of mobile phone subscribers had just surpassed 1 million. However, as of 2012, there are over 18 million mobile phone subscribers, covering over 85% of the population. Afghanistan now has wide reaching telecommunications technology.
Another major concern that has prevented companies from investing in Afghanistan is a lack of transportation. According to the World Bank report, over 25% of foreign firms in Afghanistan identified transportation as a constraint for conducting business. The year of the report, only 27.46% of roads were paved in Afghanistan, However, in just the following year, 29% of roads were paved. Additionally, as of February 2008, over 60% of a planned 3,200 kilometers in highways had been completed. Furthermore, in March 2012, Afghanistan opened its first railroad with plans to construct at least a six more. Finally, the Ring Road, in which 60% of Afghans live within 30 miles of, is 90% complete. The government of Afghanistan has made major improvements to its transportation infrastructure.
Current Efforts to Promote Inward FDI in Afghanistan
At the time of this paper, nothing visible has been, or is being, done to promote inward FDI in Afghanistan. AISA is the only organization established to take care of anything related to FDI. AISA only has a website that explains laws, the benefits of investing in different sectors, and a live support operator that has very limited availability. AISA markets inward FDI in Afghanistan very poorly and fails to be active through any social media. Furthermore, inward FDI in Afghanistan is very easily discouraged in the international community because nothing is done to address all of the negative reports that rank Afghanistan as one of the worst places to conduct business.
Ideal Way to Promote Inward FDI in Afghanistan
The best way to promote inward FDI in Afghanistan is through a branding campaign. A branding campaign can help overhaul an individual’s perception of an entire country. More specifically, it is effective because it can change the attitudes of foreign individuals about investing in Afghanistan.
The direct goal of the brand campaign will be to increase inward FDI in Afghanistan, however, there are several indirect goals of the campaign as well. For instance, stimulation of the economy will derive from increased inward FDI. A decrease in the number of unemployed Afghans will also occur because more foreign companies will have created factories in Afghanistan, thereby leading to more jobs. Finally, a decrease in the number of Afghans who join the Taliban will result because there are more jobs that pay better than the Islamist organization.
AISA, the government institution responsible for registering and licensing foreign companies interested in investing in Afghanistan, will conduct the brand campaign. The slogan of the brand campaign will be “Afghanrichstan,” and it will highlight the vast amount of natural resources that are available for investment in Afghanistan. The campaign will also highlight how profitable it is to invest in Afghanistan and its resources, as many of them are rare earth elements. Additionally, the campaign will explain how secure Afghanistan is and how investments can be insured through the World Bank if an investor is concerned about political risks.
To market this brand campaign AISA will first establish a Facebook, Twitter, and YouTube account. AISA will then post videos of different commercials involving interviews with current investors who have succeeded financially and highlighting all the advantages of investing in Afghanistan. AISA will also use Facebook and Twitter to constantly upload information about current investments in Afghanistan and how they are succeeding. Additionally, the uploaded information will include news that will put the minds of potential investors at ease, such as prosecutions of corrupt government officials.
The campaign will also be conducted via television and radio in countries that already have companies with major investments in Afghanistan. These countries include South Africa, Turkey, United Arab Emirates, Canada, the United States, the United Kingdom, and the Netherlands. AISA will pay television and/or radio broadcasting companies in each of these countries money, depending on which media outlet citizens consume the most, to run advertisements that will highlight the benefits of Afghanistan as an investment destination. The reason to campaign in countries that already have high investments in Afghanistan is that those countries have companies that are already interested in the resources Afghanistan has to offer.
Brochures will also be created for the campaign. These brochures will be given to high end hotels that attract many foreign visitors. The hotels will then give the brochures to guests along with their room key at check-in. Following this approach, wealthy individuals who have access to capital will consider the idea of investing their money in Afghanistan with the impression they will increase their funds. The brochures will also be provided to different airlines that travel to Afghanistan. These airlines can then place the brochures in the pouches in front of the seats of airplanes, allowing foreign visitors to learn about the investment opportunities in Afghanistan.
Finally, the campaign will create an advertisement for English language newspapers in Afghanistan. The purpose of this decision will be for English speaking visitors who come to Afghanistan, whether it be for business or pleasure, to learn about the potentials for investment in Afghanistan.
There will be several ways to determine if the branding campaign is successful. First, an increase in the number of inward FDI in Afghanistan from South Africa, Turkey, United Arab Emirates, Canada, the United States, the United Kingdom, and the Netherlands will suggest that the branding campaign has been effective in its television and radio broadcasts. Additionally, an increase in the number of ‘likes’ on Facebook and ‘followers’ on Twitter and YouTube for AISA will suggest that more individuals are interested in investing in Afghanistan. Additionally, seeing an increase in the number of tweets on Twitter with the word ‘#afghanrichstan’ will suggest how effective the slogan has been for the campaign. Finally, a decrease in the number of foreign investors who believe conducting business in Afghanistan is difficult will also be a sign that the messages of the campaign have been effectively communicated.
Afghanistan will benefit economically and Afghans will be dissuaded from joining the Taliban if more foreign companies directly invest in the country. While Afghanistan is still relatively unstable, both economically and politically, more inward FDI can make it less so. Afghanistan has the potential to become one of the world’s leading exporters in several natural resources if the resources are properly invested in. While the Afghan government lacks funding and technology to cultivate these resources, foreign investors can quickly and easily help put Afghanistan’s economy back on track, not just for the benefit of Afghans, but for the rest of the world as well.