The Afghan economy (III): Zal responds

A couple of weeks ago, I carried a post about a speech Zalmay Khalilzad, the former U.S. ambassador to Afghanistan (and to Iraq, and to the United Nations) gave about the Afghan economy. Today Zal checks in with a response to that post and a subsequent one from Kabul:

Two weeks ago when I spoke at Johns Hopkins University School of Advanced International Studies one of my points was that creating a functional economy and improving living standards are as important to success in defeating the enemy as our military effort. I argued for leveraging the purchasing power of the NATO and ISAF forces to stimulate the Afghan economy-encourage the creation or strengthening of Afghan businesses and putting more Afghans to work. We did this successfully in Korea and Japan and we can do in Afghanistan — where last year unemployment was estimated at 40%.

One development worker on the ground — the director of the Peace Dividend Trust, a non-profit international NGO operating in Afghanistan — in a letter to Tom Ricks stated that it was already happening. Tom in turn shared the letter on his blog at Foreign Policy.

It is true that some progress has been made because of the "Afghan first" policy. The Department of Defense is considering ways to do more. However, the steps taken-which I applaud-are very small compared to the potential, and it is this potential that I was talking about the other day and will be addressing in more detail here.

Presently, some 80% of our bases and facilities in Afghanistan — both NATO and US — receive food supplies imported from outside Afghanistan through one foreign company: chicken and meat, bread, sugar, honey, jam, eggs, vegetables and fruit juices. In fact, almost all food items, with the sole exception of water and soda, are imported.

The beverage industry represents a small success story.   It began in 2003–2004.  A number of water bottling, fruit processing, and soda production businesses have been successfully established in Afghanistan. The US military buys some of its water and other beverage needs from local companies. Why can’t the US military use its purchasing power to encourage the growth of business to supply local fruits, vegetable, juices, chicken, eggs, honey, bread and jam? The potential exists in Afghanistan to supply these needs. The success in regards to water and some others drinks can be replicated in these other areas.  I believe it serves our interests that we increasingly do so.

There is also Afghan potential in the construction material industry. The US military and NATO need large amounts of cement, steel, wood and other materials to support its local construction efforts. There is also considerable local need in this regard. At present the construction materials used by the US and NATO and local builders are imported.  Millions of dollars leave Afghanistan every month to import construction materials.

Take cement as an example. Afghanistan imports thousands of tons of cement from Pakistan and Iran every month. Afghanistan produces cement at the Ghori factory, but in low quality and quantity. Two other cement factories still need rehabilitation. Although the Afghans should be blamed for not rehabilitating the two factories (Jabal Siraj and Herat), the US could work with the Afghan government to find ways such as privatization to rehabilitate such factories and enhance their capacity. Another cement factory was supposed to be established in Jalalabad but that never materialized. Developing this industry will not only help the Afghan economy but will also mean that less cement will be imported from Iran, a country that is essentially hostile to the US.

The same applies to many other construction materials such as bricks, pipes and electrical supplies, to name a few. In all case there is existing infrastructure for producing these items locally and reducing the reliance on imports. However, the businesses that are interested in producing construction materials have been unable to compete with imported materials. All that is needed is assistance with rehabilitation, simple technology improvements and, support — by letting these businesses know that the US military will be their customer.

Many problems plague the contracting process for a multitude of services. Foreigners companies have been providing all services to NATO and ISAF forces; from logistics and cafeteria management to laundry services and instead of Afghans, foreign personnel are recruited. There are great shortcomings in our contracting mechanism — that favor foreign companies. The mechanism is so flawed that Afghan companies most of the time get to work on projects only after the project had passed through layers after layers of contractors and intermediaries, leaving only a fraction of original allocation available for the actual work.

The oil supply sector is one of the sectors in which Afghan companies are not awarded the prime contracts for fuel supply because they do not have direct access to the whole contracting processes. Most contracts are awarded outside Afghanistan.

Security and quality are legitimate issues. But as the case of water demonstrates they can be dealt with. It is a fact that currently the Afghan private sector does not have the capacity to fully meet the demands of the international forces in Afghanistan but the purchasing power of the military can be used to incentivize an ever increasing capacity of local businesses. This is an issue that needs to be discussed and better understood, so that it becomes a key element of our strategy.