Foreign Investment in Afghanistan Faces Obstacles

Lack of security and skills and corruption are major impediments to foreign investment in the reconstruction of Afghanistan.

The recently concluded summits on Afghanistan held in New Delhi and Tokyo aimed at attracting foreign investments to Afghanistan in the hope that economic growth will simultaneously instill a sense of security and political stability. Although the Afghan government has managed to achieve its target amount — the participating countries pledged $16 billion for the next four years — any investment in the country is likely to face obstacles.

Security is the most obvious impediment for any development task undertaken in Afghanistan.

For instance, Chinese activity at the Mes Aynak copper deposits in Logar Province, an area where the Taliban are still active, has still not started as it is constantly under the threat of insurgent attacks. The Wall Street Journal has reported speculation that the Chinese may be deliberately delaying the project until they can properly assess the security situation post 2014 when American and NATO forces are due to leave the country.

As certain regions of Afghanistan are more prone to violence than others, there is a possibility that foreign investments will be restricted to areas that are secure and outside the control of the insurgents. This may mean that most of the developmental aid would go to the non-Pashtun areas and communities — a belief that is said to already prevail among the Pashtuns who feel that since 2001, other communities in Afghanistan have benefited at their expense. A lopsided development of the country is likely to fuel ethnic tension and could be used by the Taliban and their allies for mobilization purposes.

Apart from security, the lack of indigenous capital is likely to be a major problem. Most of the development in Afghanistan has not been geared toward building the financial capacity and skills of the local people, thereby ensuring that Afghanistan is still a long way from becoming economically self reliant.

The mineral wealth of Afghanistan, considered to be the source for its economic self-reliance, is still at least a decade away from becoming a huge source of income. Even the development of these natural riches would require substantial amount of foreign investment, especially for the generation of the necessary infrastructure — railways and roads for transportation, power generations plants and the capacity of the local people to sustain such projects on their own.

As a result, Afghanistan will continue to depend on the “benevolence” and “generosity” of other countries for the years to come.

Although a substantial amount has been pledged so far, foreign aid will always remain hostage to and fluctuate according to the conditions of the global economy and the domestic politics and public opinion in donor countries. Similar commitments have been made in the past but apart from Iran, no country has fully delivered on its promises.

It is also worth noting that the financial commitment for now is only until 2015 and, even if the international community manages to deliver on this amount for the next four years, it is highly unlikely that they would be able to sustain high levels of spending for another decade, especially since this is above the amount already pledged to meet the cost of maintaining the Afghan security forces.

Indeed, the current level of investment may be even tougher to maintain if corruption is not checked in Afghanistan.

According to the Corruption Perceptions Index produced by the Transparency International, Afghanistan falls almost at the bottom of the list. Nearly $1 billion of the $8 billion given out in aid over the past decade has been lost to corruption.

Vygaudas Usackas, the European Union’s envoy to Kabul, told the Reuters news agency that given “the considerable fatigue among the taxpayers of Europe and beyond,” it would become extremely difficult to justify a constant flow of aid to Afghanistan to the domestic populations.

Moreover, any project in Afghanistan would have to take the interests of local warlords into account to ensure its successful completion. This is likely to increase the number of individual beneficiaries and may lead to the diversion of funds and revenues away from the central government.

Attempts to bypass the warlords may derail the process further. This was evident in General Abdul Rashid Dostum’s attempts to prevent the extraction of oil from Sar-e Pol, one of his strongholds, by the Chinese as he was not taken into confidence when an agreement was reached between the Afghan government and Chinese companies.

Finally, the bilateral problems between certain countries can act as likely spoilers to foreign investments. For instance, India’s massive investment in Afghanistan — nearly $2 billion since 2001 — has drawn the ire of Pakistan and the various attacks on Indian targets in Afghanistan have been traced back to insurgent groups based in or controlled by Pakistan.

As India seeks to increase its economic involvement further by tapping into the mineral wealth of Afghanistan, violence against Indian projects is likely to increase.

Similarly, the standoff between Iran and the United States has often put the Afghan government in a tight spot as it has been forced to balance its relations with both countries.

The continuation of financial investment in Afghanistan is essential for the country’s progress toward economic self sustainability. However, it would be extremely naive in light of the existing obstacles to believe that this transition can occur overnight or even within a decade.