Buying local: Will the US troop pullout pull the afghan out from under the Afghan economy?

Andrew Shaver, MPA


American military officials have initiated plans to withdraw the first contingent of US forces from Afghanistan this year despite the Afghan government’s dependence upon US operations for its own security and political survival. No less important, though infrequently mentioned, is the very uncertain economic future for Afghanistan in the wake of American withdrawal. The Senate Foreign Relations Committee cautioned earlier this summer that, without proper planning, Afghanistan “could suffer a severe economic depression when foreign troops leave…” Meanwhile, the Congressionally-mandated Commission on Wartime Contracting (an independent, bipartisan group established to study wartime contracting in Iraq and Afghanistan) warned in its final report this summer that many social and security programs developed in Afghanistan by the US government likely cannot be sustained by the government of Afghanistan.

While significant investigation has been done into the nature and possible effects of the significant State, Defense, and USAID spending in Afghanistan, similar scrutiny has not been applied to a major Department of Defense (DoD) program established in 2006 under which many billions of dollars have been spent on goods and services procured from Afghan firms.

Last month, Defense officials provided me with data recently made public on all contractual obligations made to Afghan firms by US Central Command’s primary contracting entity. The data are impressive. Based on commitments already made this year, DoD is on track to make more than $2 billion in obligations with Afghan firms by in fiscal year 2011. (To put matters in perspective, Afghanistan’s 2010 gross domestic product was roughly $27 billion.) While the US military begins to reduce its presence in Afghanistan, CentCom spending on goods and services provided by Afghan firms continues to increase significantly – obligations this fiscal year are 100% greater than 2009 and are set to exceed 2010 obligations by more than half a billion dollars.

Policymakers should consider possible effects on Afghanistan’s security conditions of terminating, quickly or slowly, billions of dollars in business with local firms. Has DoD business with local firms created industries that will remain functional in the years following America’s withdrawal? Has military spending created bubbles of economic activity that threaten to implode as the war effort grinds to a halt, leaving ranks of young males unemployed and susceptible to terrorist recruiting?

It is possible that the effect will be minimal. Of the roughly $1.7 billion already committed this fiscal year, nearly $1 billion are slated for purchases of various commodities. Because contracting guidelines do not require that Afghan businesses satisfy strict local-content or local-hiring requirements, little deters these firms from importing such commodities from abroad. Thus, the cessation of spending in Afghanistan may do little more than sound the death knell for an inflated market of Afghan middlemen. My discussions with contracting officials deployed in theater tend to corroborate this possibility. However, no formal study has been undertaken in this regard.

However, on the services side, data indicates that there may be jobs at stake, albeit within a somewhat narrow set of industries. Of the remaining approximately $700 million obligated this fiscal year, most are designated for the provision of “professional, administrative and management support services,” “utilities and housekeeping services,” and “transportation, travel, and relocation services.” Central Command also reported recently employing over 46,000 Afghans and estimated that a further 18,000 Afghans are employed as private security contractor personnel. Granted, many of these jobs may remain in place following a draw-down. But research into the way such industries have developed through US military spending is needed to provide policymakers with better understanding of how the timing and magnitude of troop withdrawal might ultimately affect Afghanistan’s economy.

Getting at such a question may not be as challenging as might otherwise be the case. Last year, now-retired General David Petraeus *85 *87 and Admiral Mike Mullen established Task Force 2010 to examine whether the Department’s contractual spending in Afghanistan is undermining efforts to stabilize the country. So far, this mandate has translated into investigations into whether funds have fallen into the hands of insurgency members, culminating with this summer’s finding that that the Taliban has extracted rents on US transportation spending. Yet, as an organization created to “follow the money,” as Petraeus testified to Congress, Task Force 2010 not only enjoys senior-level support but employs the type of civilian and military experts qualified to consider the broader effects of major contract spending on the country and the implications for its withdrawal. If properly resourced and directed, the task force could offer policymakers a unique way forward. Let’s hope.


A version of this article was published earlier this month by the Small Wars Journal blog, and is accessible here.

The relationship between property rights and economic growth

Ashok Ayyar, MPA 

"[Government] cannot take from any Man any part of his Property without his own consent. For the preservation of Property being the end of Government, and that for which Men enter into Society, it necessarily supposes and requires, that the People should have Property, without which they must be suppos’d to lose that by entering into Society, which was the end for which they entered into it, too gross an absurdity for any Man to own."  -John Locke, "On the Extent of Legislative Power," Second Treatise on Government (1689)

Locke argued above that personal property is antecedent to government, and its protection should be the principal function of government.[1] In his eyes, a state without fidelity for private property is no state at all, for it has violated the very social contract for which it was created.

Lockean thinking occupied the minds of political philosophers for nearly three centuries before recently migrating to economics. As if struck by lightning, development economists became enraptured by the idea of linking strong property regimes to GDP growth. Using conventional tools of the trade like cross-country regressions[2],  instrumental variables[3], and more nuanced institutional economics methods[4], several well-cited studies have asserted the importance of private property (qua property rights, or as part of the bundle of values sloppily lumped into the “rule of law”) for growth.

Taking this one step further, economist Hernando de Soto put forth the boldest and most articulate version of the property rights claim: not only are stable, secure, and well-defined property rights incidental to growth, but they are necessary for it. Ever the gumshoe, De Soto supported his argument by gathering ground-level observations of how property rights actually operate in poor countries. His capstone result, The Mystery of Capital (2000), tells a plausible story: though capital is indisputably the engine of economic growth, it is not simply cash or machines. Capital is the “legal expression of an economically meaningful consensus about assets.”[5] Law converts the passive potential energy of raw assets into capital, transmuting dull lead into effulgent gold. It turns a parcel of land or an enterprise into a reservoir of surplus value that can again be harvested for profit. Where developing countries have stumbled, de Soto contended, has been in their failure to establish an ordered “system of rules” that facilitates this process. And what else is such a system but law?

A well-ordered property law allows ordinary people to: 1) fix the economic potential of assets, 2) integrate dispersed information about assets in one place, 3) make people accountable for their debts, 4) make assets marketable, and 5) connect assets beyond the informal networks of their owners.[6] While Western nations gradually acquired a property law with these characteristics, developing countries remain mired in a disjointed property system that, at best, converts assets into capital at a glacial pace. People in those countries spend months or years tangled in the web of red tape.

The property rights chorus now reverberates in the halls of the World Bank and other development agencies.[7] Though there are still some dissenting voices, their cautions are muttered sotto voce, far from any actual policy-making.

Yet, as policy students, we should question the wisdom of this (and other) accepted truths. Have de Soto et. al. really conquered their foes, and convincingly made the case for formal property rights? Or is this idea, like so many others in the kitchen-sink development literature, another paean sung to a false god?

I think de Soto’s camp has won the debate for now, both on its merits and by virtue of policy-world take-up. I am inclined to believe that secure property rights are, if not the silver bullet, instrumental to economic growth. Furthermore, growth theory today has zeroed in on “institutions” as the best explanatory variable for growth. Notably, property rights appear at or near the top of most clearly-defined lists of institutions.[8] Thus, whether standing bare, or dressed in the clothing of institutions, property rights as the road to growth commands great support – and deservedly so. Only time will tell if the resulting policy of property law reform pans out.


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References:
[1] Do not forget the founding fathers enshrined his thinking as the cornerstone of the new republic. See Richard Hofstadter, The American Political Tradition (1948), pp. 10-12.
[2] Robert J. Barro, “Determinants of Economic Growth: A Cross-Country Empirical Study,” National Bureau of Economic Research, Working Paper No. 5698 (1996).
[3] Ibid. See also Daron Acemoglu, Simon Johnson, & James A. Robinson, “The Colonial Origins of Comparative Development,” American Economic Review, Vol. 91 (2001).
[4] Oliver C. Williamson, “The New Institutional Economics: Taking Stock, Looking Ahead,” Journal of Economic Literature, Vol. 38 (2000).
[5] Hernando de Soto, The Mystery of Capital (2000).
[6] Ibid.
[7] At the Bank, the high priest of property rights is Phillip Keefer, and he seems to have won over his colleagues. See Stephen Knack & Phillip Keefer, “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures,” Economics and Politics, Vol. 7 (1995).
[8] Take it from no less an authority than Douglass North. See Douglass C.  North, Institutions, Institutional Change and Economic Performance (1990), noting the most important source of underdevelopment is because of the absence of stable property and contractual rights.