Carpet vendor in Kabul, Afghanistan <br>(2005). Photo by <a href="">Steve Evans</a> (<a href="">CC</a>).
Carpet vendor in Kabul, Afghanistan
(2005). Photo by Steve Evans (CC).

Policy Innovations Digital Magazine (2006-2016): Briefings: Post-Invasion Economies

Sep 18, 2007

Sustainable economic growth has been a major goal of reconstruction efforts in post-invasion Iraq and Afghanistan. Enhancing each state's ability to trade and attract investment will go a long way toward improving citizens' lives, though without governance reforms and an end to instability and violence these economies cannot expect to grow. Despite these obstacles, both countries have significant economic factor endowments—oil in Iraq and arable land in Afghanistan.

According to the World Bank, Iraq is now worse off economically than it was 25 years ago. Since the U.S. invasion in 2003, economic growth has been crippled by domestic insecurity. In 2003, GDP growth fell by 41 percent, though it climbed 46 percent in 2004. Civil war and instability have slowed development to a crawl.

Iraq's best chance for improving living standards is to develop its oil industry. Oil comprises two-thirds of Iraq's domestic output and 98 percent of its exports. Oil revenues totaled $29.5 billion in 2006, according to the State Department. Even so, the Iraqi oil industry has not been fully exploited. The Energy Information Administration (EIA) reports that Iraq has 115 billion barrels of oil reserves. This is the third largest holding in the world, behind Saudi Arabia and Canada. This estimate may be low, as only 10 percent of the country has been explored. The EIA cites several sources that suggest that Iraq's unsurveyed western region could hold another 100 billion barrels.

One pitfall of exploiting oil is Dutch Disease, whereby a consolidated effort in one sector is detrimental to other nascent sectors, such as agriculture and industry. Former Iraqi Planning and Cooperation Minister and current MP Mehdi Hafedh said recently that "dependence on oil is not sustainable," and stressed the need to develop other sectors of the economy. The other complication is that the Iraqi government has so far failed to pass oil-sharing legislation, one of the key political benchmarks outlined by the United States.

Terrorist attacks against Iraq's oil infrastructure constitute another major barrier to continued resource development. "The oil industry has not been a real aid to the strengthening of Iraq's economy, as attacks on oil and gas pipelines are comparable to cutting Iraq's economic veins," Iraq's Oil Minister Thamer Ghadban said in 2005. Attacks against the Kirkuk pipeline in the north are costing Iraq millions of dollars in daily losses.

In July 2005, a Trade and Investment Framework Agreement was signed between the United States and Iraq to encourage bilateral trade. U.S. exports to Iraq in 2004 were worth $856.5 million. The Bush administration has also encouraged Iraq's neighbors to increase trade and investment in the country and to forgive the former regime's billions of dollars of debt.

On the multilateral level, the government of Iraq, the United Nations, and the International Monetary Fund assembled the International Compact with Iraq, a plan for public and private sector reforms to develop a self-sustaining economy. The public sector reforms center on equitable distribution of resource income, reducing government subsidies on gasoline, and redrafting pension laws. The private sector reforms focus on encouraging business start-ups, reforming the judicial sector to strengthen the protection of private property, and financing entrepreneurs.

In contrast with Iraq, Afghanistan's economy has enjoyed high growth since the U.S. mission in 2001, settling into about 8 percent annually. Much of this growth has come from agriculture, especially wheat, though growth based on wheat is limited in the long term by water intensiveness and lack of export prospects.

International reconstruction aid for Afghanistan largely has humanitarian aims. In 2006, international donors pledged $10.5 billion for reconstruction as part of the Afghanistan National Development Strategy. The purpose of this drive is to achieve "high rates of sustainable economic growth with the aim of reducing hunger, poverty and unemployment."

It is difficult to estimate the unemployment rate in Afghanistan due to scarce data, as World Bank Country Director Alastair McKechnie indicated in a May 2007 interview with Radio Free Europe. Further compounding the unemployment issue is the influx of returning refugees from Iran (1.47 million) and Pakistan (3 million).

Carnegie Council Senior Fellow and veteran Afghanistan journalist Jere Van Dyk is currently on assignment in the country. He reports from the capital.

"Despite the $10.5 billion, and billions pledged and received before this, roughly 40 percent of the Afghan rural population does not get enough to eat," Van Dyk said.

"There are thousands of children and women begging in the streets of Kabul. The streets have not been repaired. The sewers are open and line both sides of every street," he added. "Many people in Kabul do not have electricity or running water. The vast majority of the people in the countryside, where 85 percent of the population lives, do not have electricity or running water."

The picture in the countryside isn't rosy, it's poppies. Estimates vary on the size of the opium economy relative to Afghan GDP, but a joint World Bank–United Nations Office on Drugs and Crime (UNODC) report puts the figure at one-third of total economic activity. The drug trade is concentrated along the southern Afghan border with Pakistan and Iran, and opium, which is suited to the Afghan climate, has become the largest source of export earnings.

According to the World Bank–UNODC report, "Drug money is a very important, often dominant ingredient in the informal financial transfer system (hawala), which is also the main vehicle in Afghanistan for payments and transfers of funds, including remittances and much aid." Illicit funds are also a disruptive force in the state-building process, fueling corruption.

World Bank credits and loans are awarded for different purposes in Afghanistan and Iraq, reflecting the different issues the countries face. Funds for Iraq focus on urban development, while in Afghanistan the focus is on rural development. Iraq's population is largely educated, urban, and middle class, with access to water and food. Afghanistan's population is illiterate, rural, and poor, with little access to basic social services.

Although Iraq suffered under Saddam Hussein, it is better suited to private sector economic development—it did not experience the kind of economic collapse that Afghanistan endured under the Taliban or the illicit economy that persists despite the U.S. presence.

Economic development is essential to reconstruction. Without it there is little hope of stabilizing either of these two fledgling democracies. The level of violence in both countries threatens to derail growth and reverse the small, though important steps toward modernization that have occurred.

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