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Going Dutch in Afghanistan

President Obama’s speech on the US presence in Afghanistan last night left me with more questions than answers. What about Afghanistan beyond troop reductions? What happens once the troops leave? That’s something we’ve been thinking about at Peace Dividend Trust (PDT) for the past several years. Our response: build Afghanistan’s markets.

Imagine our surprise when we recently saw data about those markets that indicate that “an estimated 97 percent of Afghanistan’s gross domestic product (GDP) is derived from spending related to the international military and donor community presence.” That’s from a recent Senate Foreign Relations Committee report.

Data can be deceptive.  That’s an important fact to consider, especially in this age of impact measurement where data trumps anecdotes, as it should and, instead, leads us to solutions based on evidence.

But when looking at a recent Senate report on Afghanistan, I had to pause and ponder some of the information. Was that 97 percent true? No wonder Washington is worried that the country will be “plunged into a deep recession” once the US military withdraws. And no wonder David Brooks wrote in his most recent column that this infusion “created dependency, fed corruption, contributed to insecurity and undermined the host government’s capacity to oversee sustainable programs.”

Yet after chatting with our in-house PDT economist, Lucy Heady, I realize Washington can breathe a little easier. The percentage quoted in the committee report (from an unpublished World Bank memo) is presented in an extremely misleading way. Washington misrepresented the data.

What the report should say about the 97 percent is that “‘spending related to the international military and donor community presence is equivalent to 97% of Afghanistan’s GDP,’” explains Heady. Huh?

To the non-economist, this might not sound like much of a difference, but consider this: GDP is consumption, investment and exports minus imports, which means that all of the money spent by the military and international donors on imported goods barely affects the measurement of Afghanistan’s GDP at all and expenditure on foreign consultants does not affect it at all.

In other words, foreign military and donor spending is equivalent to 97 percent of Afghanistan’s GDP rather than 97 percent of Afghanistan’s GDP actually being reliant on this spending. Most of the foreign money being spent is not going into Afghanistan’s local economy.

What about the money that actually is making it into the local economy? Because no one is tracking this, no one can predict how much US troop withdrawal will affect Afghanistan’s economy.

“It will certainly have a serious negative impact at withdrawal,” Heady says. “But to imply that Afghanistan’s GDP will fall by 97 percent is ludicrous.”

Such a negative impact caused by a quick rise in a country’s income from foreign sources is called Dutch Disease. This phenomenon is always on PDT’s radar. To combat it in Afghanistan PDT has focused on facilitating contracts between the national government and local businesses.

Heady suggests the US should play a similar, but more broad role:

“The military should be training the businesses that they procure from in accessing other markets and helping them invest in the skills or machinery that would help them to service sectors of the economy that are growing.”

The concern over Dutch Disease has been exacerbated by the notion that after 2014, the US will simply abandon the country, both militarily and economically. Obama has done little to ease these fears. In May both his Middle East speech and joint briefing to the British Parliament reiterated the withdrawal of troops without any mention of future economic partnerships.

Many experts recommend a ramp up of the US’s Afghan First policy. But promoting regional trade will be just as, if not more, important. The Central Asia Study Group released seven key recommendations for the US’s agenda in Central Asia, one of which was promoting regional trade. Regional cooperation, in the form of unfettered trade, will do the most to promote stability in Afghanistan and surrounding countries.

Spurring the US to review its economic policies in Afghanistan is an important and welcome result coming out of this report. Going forward, the US should continue its Afghan First policy while focusing on local SME capacity building and promoting regional trade.

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  1. […] article originally appeared on PDT’s Building Market’s blog on June 23, […]


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