Trade as a Vehicle for Growth in Afghanistan : Challenges and Opportunities

Why trade matters for Afghanistan

With further declines in international assistance expected over the coming years, the Government of Afghanistan faces a new challenge: enabling new growth drivers. One such driver is trade. Decades of civil war and military occupation that culminated in the fall of the Taliban in 2001, have devastated Afghanistan. High levels of conflict destroyed infrastructure, displaced a significant share of the population, incentivized informal and illicit economic activities, and jeopardized the delivery of public services. After 2001, the country entered a phase of reconstruction where high levels of economic growth have been largely fueled by foreign aid. Since 2014, Afghanistan has once again been in a phase of transition, this one characterized by the withdrawal of the United States and other allied forces and accompanying cuts in military and development spending. As the economic stimulus of reconstruction gradually disappears, Afghanistan must look to alternate avenues for more sustainable growth.

Trade could be an important channel for accelerating growth in Afghanistan. Trade is believed to promote the efficient allocation of resources, allow a country to realize economies of scale and scope, facilitate the diffusion of knowledge, foster technological progress, and encourage competition in both domestic and international markets. Aided by large reductions in trade barriers and technological advancements, developing countries have become the drivers of global trade in recent years. There is now little dispute that, in the long run, economies more open to trade show stronger economic growth and overall development performance.

A plausible trade-driven growth scenario for Afghanistan should promote economic and export diversification. For a while, development of mineral resources has been thought to be the best avenue to improve trade and growth for Afghanistan. However, despite its potential, it is uncertain whether the development of the extractive sector will contribute to the Afghan economy in the short- to mediumterm. In addition, reliance on extractive industries can both exacerbate conflict and governance risks and impede broader economic development. Promoting production and exports of more labor-intensive goods and services might instead reduce the risk and intensity of conflict through increases in real incomes and employment. This report brings new evidence on the opportunities and challenges for development in the areas of trade in goods, trade in services, and transit trade. It also provides recommendations for an appropriate sequencing of policy reforms and strategic infrastructure investment to support potential growth in these sectors.

The main findings of this report suggest that government intervention should focus on two complementary areas: competitiveness and connectivity. First, Afghanistan’s largest constraint is insufficient production capacity. Second, lack of economic diversification and high concentration of exports and imports in terms of products and number of destinations has prevented Afghanistan from fully exploiting its trade potential. Third, poor logistics and trade infrastructure, rather than lack of market access, are responsible for Afghanistan’s trade underperformance. Improvements in trade facilitation and logistics could therefore have a positive impact on Afghanistan’s trade in the short -to medium- term. Fourth, service sector development is constrained because of Afghanistan’s small domestic markets, as well as limited endowments of skills and capital. In the long run, these constraints could in principle be alleviated by greater regional and global integration. Fifth, the potential of transit trade in commodities and energy might be modest and slow to materialize. Realizing these benefits requires efficient logistics, well-designed and maintained infrastructure, and a propitious framework of regulation and regional cooperation.