26 September 2004	Sunday	10 Shaban 1425

KABUL: In the weeks leading up to the first presidential election in Afghanistan, a new World Bank report finds that the country's future prospects depend on whether the political leadership can free it from a vicious cycle in which a largely informal economy, the opium trade, and violence reinforce each other. This has hindered state-building activities, and undermined development efforts.

The first economic report on Afghanistan by the World Bank in a quarter century stresses that these various elements must be addressed in order for the country to escape the poverty and violence it has endured for three decades.

The report is designed to contribute to a greater understanding of the core challenges that lie ahead for Afghanistan and key priorities for national reconstruction. "In any country, development is multifaceted, but for Afghanistan now, addressing the key problems of insecurity, state building, reconstruction, and drugs in a timely, coordinated manner is absolutely pivotal to determining which path the country will follow in coming years," said William Byrd, Senior Economic Advisor and principal author of the report, who has spent the last three years working on Afghanistan issues.

"Various parts of Afghanistan have been captured by regional powerbrokers who oppose reform. Their operations are fulled by the opium trade and bolstered by their ability to rule illegitimately by force, relatively unchecked, outside Kabul."

He described the economy as recovering: "but 80 to 90 per cent of it, including the opium trade, is informal-meaning entrepreneurs cannot become sizeable registered businesses, and the government cannot collect revenue. In turn, a weak government with insufficient funds and technical expertise cannot provide the economy with the support it needs to grow, nor can it provide the people with the security from violence and the social services they need to thrive."

He maintained that sustained and well-coordinated international support for the Afghan government in all of these areas is critical to the future of the country.

The report, Afghanistan: State Building, Sustaining Growth, and Reducing Poverty, praises the development and state-building efforts of the Government of Afghanistan, but says that despite some improvements, these are not receiving enough direct support from the massive amount of donor aid which is still largely provided outside the government's budget.

In addition, government leadership is undermined by what the report calls a "second civil service" of consultants, advisors, and employees of international aid agencies and NGOs.

The report argues that both of these factors are a hindrance to state building, which is fundamental in Afghanistan if the good work being done now is to be sustainable in the long run.

The report also points to the continuing power of warlords and unchecked violence as undermining efforts to develop a strong central government, and it cites insufficient international security assistance outside Kabul. The opium economy is described as the lynchpin of the vicious cycle-with adverse effects on security, political normalization, regional relations, and state building.

The report says that opium production and trade has become Afghanistan's leading economic activity, supporting powerful warlords and a drug industry which has a strong interest in preventing the emergence of an effective, accountable state.

Given the importance of the opium economy (which is estimated to be roughly one third of total economic activity in Afghanistan) and the dependence of many poor people on opium for their livelihood, the report argues that getting out of this trap will require sustained, coordinated and well- sequenced actions on a number of fronts.

There is a case for giving initial priority to interdiction- law enforcement measures against drug traffickers and drug processors and their sponsors-with development of alternative livelihoods for farmers. This would be followed by eradication of the poppy fields of those who continue to produce opium even when viable alternatives are available.

The report emphasizes that phasing out drugs will be a long-term effort requiring sustained political commitment and international support, and will be possible only if there is sustained rapid growth of the non-drug economy.

Afghanistan has a robust informal economy which the report says has been a coping mechanism for Afghans' survival during conflict. However such an economy, while flexible, is born out of insecurity, lack of public services and short time horizons. This causes entrepreneurs typically to maintain small, unregistered businesses without any longer-term investment which could expand the economy and provide more jobs.

In addition, it does not allow for much revenue mobilization by the government, or for sustained growth of exports which requires quality certification, strong linkages with markets, and export financing.

Harnessing the dynamism of the informal economy in legal activities by providing small loans known as "micro-credit," stimulating smallholder agriculture activities-agriculture comprises half of the Afghan economy-and helping to develop cooperation among informal actors are examples of important areas of support, the report suggests.

Over time a better business environment, improved security, enhanced state capacity , and expanding linkages between the formal and informal sectors will help shift incentives toward progressively formalizing parts of the economy. Government and donor support aimed at improving the business climate and regional trade and building private sector capacity will be very important, according to the report.

Critically, Afghanistan's economic and political advancement will be unsustainable without addressing the social needs of the country's population, including women. The report stresses the need in development programmes to focus particularly on women. It says that while efforts are being made to promote economic growth, the poor and vulnerable need to be helped in their efforts to build assets and livelihoods, and cost-effective social "safety nets" are needed to protect those among them who are unable to fully benefit from economic growth.