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Leveling the Afghan Playing Field

NEW YORK – Afghanistan’s security and political situation remains plagued by uncertainty, stemming from the withdrawal of United States and NATO combat troops, the upcoming presidential election, and the stalled peace negotiations with the Taliban. Recognizing that continued economic insecurity will exacerbate this perilous situation, the government has announced a new package of economic incentives aimed at attracting foreign direct investment.

The package includes the provision of land to industrialists at dramatically reduced prices, tax exemptions of up to seven years for factory owners, and low-interest loans of up to ten years for farmers. Such incentives are targeted at foreign investors and the local elite, with the aim of stopping or even reversing capital flight. But the new measures ultimately amount to more of the same: a fragmented policy approach that will prove inadequate to solve Afghanistan’s fundamental economic problems.

In the early stages of the post-war transition, FDI increased rapidly, rising from 1.2% of GDP in 2002 to a peak of 4.3% of GDP in 2005. Most of these inflows were directed toward the construction and services sectors – the main drivers of GDP growth – and aimed to satisfy international demand, both civilian and military.

But, in 2006-2007, FDI levels began to fall, owing to a sharply deteriorating security situation, a continued lack of electricity and adequate infrastructure, a shortage of skilled labor, inadequate legal and regulatory systems, inefficient bureaucratic procedures, and the need to renew companies’ licenses annually. Land grabs, chronic corruption, impunity, the inability to enforce contracts, and the fragmentation and ineffectiveness of aid deterred foreign and domestic investment further. As a result, FDI collapsed to less than 0.5% of GDP annually in 2011-2012.