Afghanistan's Agenda for Action - Economic Growth - usaid

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Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007educational infrastructure is largely colored byCommunist doctrine held over from the 1970’s and1980’s.) The national literacy rate is less than 40%.This means that, aside from radio and television (whichboth depend on technology and electricity), there areno media for sharing a common understanding. Thereis little appreciation for an objectively neutralauthoritative text – such as a law or tax regulation,because most must have it read to them. There is alsopainfully little quantification in a society wherenumerical literacy is not any more widespread thanwritten literacy. This lack of numeracy has majorimplications for the growth and government of acomplex society, from management and promotion of amarket economy to the collection, recordation, andexpenditure of tax revenue, to even the simplest ofbusiness decisions. There is also a lack of understandingabout the role of public servants. Government waslong a place to accumulate wealth and power at theexpense of attention to fiduciary responsibilities.The lack of human capital is pervasive and its effectsare multi-fold. For example, a dearth of professorswho can teach market economics results in aconcomitant lack of businessmen, governmentfunctionaries, intermediaries, and price-wise consumerswho make up the functioning market economy that isso critical to national self-sustainment. The lack ofdomestic human capital also fuels imports of humancapital from neighboring countries for critical functions,thereby decreasing the “Afghan-ness” of the economyand marginalizing what would otherwise be anindigenous middle class (with perhaps predictablynegative consequences to government stability).Women comprise almost 50% of Afghanistan’spopulation – and they work. While businesswomen inthe formal sector do exist, most women work in thehome without remuneration. Barriers to their entryinto the mainstream of the economy are numerous andinclude the following: social constructs, traditionalgender roles, domestic chores that remain laborintensive due to lack of modern appliances, lack ofhigher education, and a literacy that is less than halfthat of males. 7 Pioneering female entrepreneurs aremostly widows who are thus able to negotiate andotherwise speak for themselves in the business context.Banks, government offices, and other institutionscritical to business are getting used to dealing withwomen professionally. The greatest hope for bringingthis underutilized part of the workforce to greatercapacity may lie in the reinvigoration of the carpetindustry and agricultural processing. 8D. Opportunities for the FutureAlthough much of the information pertaining toAfghanistan’s business environment does not paint apositive picture, the Diagnostic team found manypromising areas of change, growth, and opportunity.These include the following:• Sharī’ah-based lending may represent apowerful force behind economic growth in thefuture. Loans are structured to assure compliancewith restrictions imposed by Sharī’ah prohibitingthe collection of conventional interest. Lendershave been able to obtain fatwas 9 assuringborrowers that a type of transaction is incompliance with Sharī’ah. A typical Sharī’ahcompliantloan is a murabaha loan, that is, a“buy/sell” arrangement. Under such anarrangement, the lender buys the item to befinanced directly from the vendor. The lender thenresells it to the borrower at a mark-up. Because7 CIA World Factbook 2007.8 Photo credit: Michael F. Cardoza, personal collection.9 A fatwa is a legal pronouncement made by an Islamic scholaron matters involving the Sharī’ah.8
Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007the lender only derives a profit from the mark-upon resale and is paid that amount without interest,there is no “riba” or interest involved in thetransaction, and it does not run afoul of theSharī’ah prohibition from the collection of riba.• Another area that has seen immediate acceptanceand growth is the leasing of equipment. Thishas obvious advantages. First, this simplifiesrepossession rights because the title stays in thename of the lessor-finance company. Second, thereis no interest involved (at least not outwardly) andtherefore, the transaction does not violate theSharī’ah principle against charging interest. Eventhough in substance these transactions areeconomically identical to secured financing, theirbeing classified as leases gives them advantages inmarketing and enforceability.• The new Law on Contracts is clear, wellwritten, and consistent with both Sharī’ah andinternational best practices. When the process ofimplementation begins in earnest, it has thepotential to serve as an excellent tool for teachingthe fundamental principles of modern contract law.• A significant opportunity relating to Afghanistan’sCounter-Narcotics Strategy is the development oflarge-scale agri-business. Given the productsproduced in Afghanistan before the conflict andsince, the potential for such enterprise certainlyexists. Of course, it is difficult to suggest thisopportunity against a backdrop of constantdroughts, harsh winters, wars with the Taliban andAl Qaeda, religious conflicts, lawlessness, andunderdeveloped transportation, electric, andsewage infrastructures. Yet agri-businesses arebeginning to flourish, the rule of law is improving,finance systems are evolving, and goods arebeginning to move.Indeed, there is, within these examples and in manyothers set forth in this Report, hope in Afghanistan.Summary of Subject-SpecificFindingsThe findings of the 17 subject-matter areas examined inthis Diagnostic are summarized as follows:Islamic Law (Sharī’ah). Afghanistan is byConstitutional definition an Islamic Republic, onewhose laws and government are legitimate only to theextent that they do not conflict with Sharī’ah. Lawscurrently in force exhibit a significant degree of secular“assistance,” as do draft laws currently pendingenactment. While it is likely that outside help will notbe overtly rebuffed by Afghanistan, it is also quitepredictable that laws that are not Sharī’ah-compliantwill not be enforced, thereby eroding respect for anduniversal application of the rule of law. Afghanistan, andother countries in the region, are finding that Sharī’ahcompliantbanking and business are enormouslycompatible with realizing profit and the growth ofeconomy generally. On the other hand, to be viewed inthe long-term as a destination where outsiders feelcomfortable doing business, Afghanistan is challengedwith incorporating Islamic law in a way that is notperceived as unduly complicated, biased againstforeigners, or unpredictable.Company Law and Corporate Governance. Asimple yet effective Company Law is one ofAfghanistan’s best bids for bringing informal businessinto the formal sector where it can enjoy statepromotion, protection, and recognition (and thepayment of taxes). Afghanistan’s new Company Lawbrings modern international best-practices to what wasan unwieldy and often impenetrable legal regime. Dueto foreign assistance in drafting, some of itsidiosyncrasies are not entirely appropriate forAfghanistan’s circumstances, but are none thatsignificantly detrimental. The Company Law holds roomfor further improvement, particularly in the areas ofcontinued reduction of the impact of state bureaucracyon business.Contract Law and Enforcement. From a Westernperspective, Afghanistan’s existing Contract Law isbiased in favor of releasing parties from theircontractual obligations. Much of this dynamic is derivedfrom tradition and custom, some is derived fromSharī’ah compliance. In many cases, the law codifies an“at-will” contract where performance is conditioned oncontinued mutual assent. Not unsurprisingly,mechanisms for enforcement or damages in the eventof breach are stunted. A draft Contract Law representsa major step into formalizing and mainstreaming theinformal economy by taking business arrangements outof the minds of the dealmakers and putting them onto9
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Nicholas Klissas, USAID/EGATTel: 20
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