Report No. 1777a-AF FIL E C f i \ Afghanistan The Journey to Economic Deve '"- ' (In Two Volumes) Volume 1: The Main Report March 17, 1978 Countrv Programs Department I Europe Nliddle East and North Africa Region FOR OFFICIAL USE ONLY H Document of the World Bank This document has a restricted distribution and may be used by recipients only in.the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Calculations in this report have been based on the average free rate for 1976/77 as follows: US$1.00 = Af 47.38 Af 1.00 = US$0.0211 By December 31, 1977 the rate had appreciated to Af 43 to the dollar WEIGHTS AND MEASURES 1 Jerib = 0.2 hectare 1 Seer = 7.14 kilogram ABBREVIATIONS AFC - Afghan Fertilizer Company ASC - Afghan Seed Company AgBank - Agricultural Development Bank DAB - Da Afghanistan Bank DAF - Development Assistance Fund FAO - Food and Agricultural Organization FPD - Food Procurement Department GM - Government Monopoly HAVA - Helmand-Arghandab Valley Authority IDA - International Development Association IDBA - Industrial Development Bank of Afghanistan MOPH - Ministry of Public Health NCD - Northern Coal Department NOC - National Oil Corporation Plan - First 7-Year Development Plan - 1976/77-1982/83 RDD - Rural Development Department UNDP - United Nations Development Program WAPM - Water and Power Ministry WFP - World Food Program FISCAL YEAR March 21 through March 20 POPULATION Throughout this Report an estimate of the mid-1977 population of 14 million has been used. This figure represents the best judgment of IBRD staff drawing on a number of different sources. The derivation of the figure is explained in detail in Volume II. It should be noted that this figure differs from what is given in the official publications of the Government of Afghanistan. FOR OFICIAL USE ONLY AFGHANISTAN THE JOURNEY TO ECONOMIC DEVELOPMENT VOLUME I The Main Report VOLUME II Source Material and Statistics on the Economy of Afghanistan This report was prepared by the members of a mission which visited Afghanistan for about four weeks in April/May 1977. The following participated in the mission and the writing of the report. Basil G. Kavalsky (Chief of Mission) John Borthwick (General economist) Wadi Haddad (Education specialist) Hasan Imam (General economist) Arabinda Kundu (Statistical specialist) Jacob Meerman (Fiscal economist) Christian Remy (Planning specialist) Stuart Taylor (FAO) (Agricultural economist) | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discosed without World Bank authoriation. A AFGHANISTAN THE JOURNEY TO ECONOMIC DEVELOPMENT VOLUME I Table of Contents Page No. COUNTRY DATA A SUMMARY OF THE DEVELOPMENT STRATEGY .......................... ii PART I: A VIEW OF THE ROAD. 1 I. THE SETTING 2 A. The Land. 2 B. The People. 4 C. The Structure of the Economy. 9 II. THE JOURNEY SO FAR .18 A; Afghanistan's Political Evolution .18 B. Economic and Social Development .22 C. The Economy from 1973 to 1977 .28 D. The First Seven-Year Plan ....................... 31 E. The Development Perspective .34 III. THE ROUTE AHEAD: POPULATION AND INCOME .35 A. The Demographic Perspective 35 B. A Profile of Living'Standards .41 C. The Level and Distribution of Income .50 D. Attacking Poverty .55 PART II: SECTORAL PROGRAMS: THE VEHICLES OF DEVELOPMENT 58 IV. THE AGRICULTURAL ECONOMY ........................... 59 A. Agriculture in Afghanistan at Present .59 B. Constraints to Development ................,. 65 C. Potential for Agricultural Development .69 D. Policy Measures and Programs .77 E. Agriculture and Rural Development .92 V. PRIVATE NON-AGRICULTURAL ENTERPRISES ..... .......... 105 A. Role of Private Non-Agricultural Enterprises in the Economy ; .105 B. The Constraints to the Development of Private Industry .114 C. Realizing the Potential of Private Industry 117 Table of Contents (Cont'd) Page No. PART II: (Cont'd) VI. STATE ENTERPRISE IN INDUSTRY AND MINING .... ........ 121 A. Background and Characteristics ..... ............ 121 B. Management of,State Enterprises ..... ........... 124 C. Perspective for the Future: The Seven-Year Plan 127 D. Identifying an Appropriate Industrial Investment Strategy ....... ................... 130 E. Improving Public Sector Management and Planning. 136 VII. PHYSICAL INFRASTRUCTURE ........ .................... 139 A. Transportation .......... ....................... 139 B. Telecommunications ........ ..................... 150 C. The Energy Sector ......... ..................... 151 D. Rural Infrastructure ....... .................... 164 VIII. EDUCATION AND MANPOWER ........ ..................... 170 A. Development of the Education Sector .... ........ 170 B. The Present System ........ ..................... 172 C. Major Issues in the Educational System ......... 182 D. Educational Policy and Strategy ..... ........... 185 E. Education and Development ........I .............. 192 IX. THE PUBLIC HEALTH SITUATION ...... .................. 197 A. Health Perceptions .......... 197 B. The Public Health Program .... 201 C. The Health Delivery System ...... ............... 205 D. Family Guidance Services ...... ................. 219 E. Conclusions ............. ....................... 223 PART III: ECONOMIC MANAGEMENT AND FINANCE: FUELING THE DEVELOPMENT PROCESS ..... ............... 227 X. ECONOMIC ADMINISTRATION AND PLANNING .228 A. The Role of Public Administration in the Development Process .228 B. The Planning Process in Afghanistan .244 XI. DOMESTIC RESOURCES .257 A. Public Finance .257 B. Banking .278 C. The Determinants of the Price Level .285 Table of Contents (Cont'd) Page No. PART III: (Cont'd) XII. EXTERNAL RESOURCES ........... ...................... 291 A. Exports ......................................... 292 B. Imports ......................................... 301 C. Terms-of-Trade .............. .................... 305 D. The Balance of Payments ...... .................. 306 E. Trade Policies and Institutions ..... ........... 311 PART IV: THE DESTINATION: DEVELOPMENT FOR ALL .315 XIII. A STRATEGY FOR AFGHANISTAN'S DEVELOPMENT .316 A. Development Priorities .316 B. The Mission's Proposals .321 C. A Macro-Economic Scenario for Afghanistan .353 XIV. Conclusions .356 MAP VOLUME II: SOURCE MATERIAL AND STATISTICS ON THE ECONOMY OF AFGHANISTAN Page 1 of 3 pages BASIC DATA 1/ AREA POPULATION (1976/77) Total: 4,750 km2 Total: 14.0 million = 65 million hectares Urban: 2.5 million Arable: 8 million hectares Rural: 10.0 million Pasture: 40 million hectares Nomadic: 1.5 million Rate of Growth: 2.2% EDUCATION (1974/75) HEALTH (1976/77) Adult Literacy Rate: 8-10% Population per Physician: 12,900 (1970/71) Population per Hospital Bed: 5,200 Enrollment Ratios: Primary School: 29.8% Secondary School: 12.0% Higher Education: 6.7% 2/ GNP PER CAPITA (1576/77)* $160 Rate of Growth: 3.1% (1966-76) LABOR FORCE (1975/76) Thousands % of Total Agriculture and Livestock 2492.8 52.9 Industry and Mining 40.7 0.9 Handicrafts 843.6 17.9 Construction 44.7 0.9 Transport and Communications 56.6 1.2 Commerce 257.3 5.5 Services 691.6 14.7 Other 282.7 6.o Total 4710.0 100.0 3/ GOVERNMENT FINANCE (Af Million) E~stimate 1974/75 1975/76 1976/77 Current Receipts 10,250 12,025 13,600 Current Expenditures 6,244 9,081 10,377 Current Surplus (Deficit) 4,006 2,944 3,223 Capital Expenditures 4,648 6,065 11,500 External Assistance (net) 1,645 3,709 4,423 1/ Afghan Demographic Survey, CSO, and Mission Estimates. 2/ World Bank Atlas, 1977 3/ IMF Estimates. Page 2 of 3 pages BASIC DATA MONEY, CREDIT AND PRICES (Million Af Outstanding End of Period) 1974/75 1975/76 1976/77 Money and Quasi Money 15,195 17,822 23,784 Bank Credit to Public Sector (net) 11,118 12,423 13,680 Bank Credit to Private Sector 5,253 5,585 6,802 Annual Percentage Change in 1/ Domestic Prices 15.4 6.6 3.4 BALANCE OF PAYMENTS (us$ million) Est. 1974/75 1975/76 1976/77 Exports of Goods 230.6 235.5 310.0 Imports of Goods 242.5 277.5 343.4 Balance of Trade -11.9 -42.0 -33.4 Other Current Account (net) -14.0 -12.4 -16.2 Balance on Current Account -25.9 -54. -49.6 Net Loans and Grants 40.8 93..6 111.8 kDisbursements) 67.4 111.6 129.5 (Amortization) -26.6 18.0 17.7 Other Items n.e.i. 10.4 13.6 5.7 Increase in Reserves 25.3 52.8 67.9 MERCHANDISE EXPORTS (us$ mi.) (US$'m.j 1974/75 Percent 1975/76 Percent Dry Fruits and Nuts 58.2 25.2 54.7 23;2 Fresh Fruits 31.5 13.7 20.1 8.5 Karakul 12.7 5.5 10.4 4.4 Cotton 34.7 15.0 35.3 15.1 Carpets and Rugs 19.9 8.6 16.1 6.8 Natural Gas 32.1 13.9 46,.3 19.7 All Other Commodities 41.5 18.1 52.6 22.3 Total 230.6 100.0 235.5 100.0 1/ Estimated. Page 3 of 3 pages BASIC DATA RATE OF EXCHANGE (Annual Average Free Rate) 1972/73 - US$ 1.00 = Af 80.50 Af 1.00 = US$ 0.0124 1973/74 - US$ 11.00 = Af 60.72 Af 1.00 = us$ 0.0165 1974/75 - US$ 1.00 = Af 56.58 Af 1.00 = US$ 0.0177 1975/76 - US$ 1.00 = Af 55.04 Af 1.00 = US$ 0.0182 1976/77 - US$ 1.00 = Af 47.38 Af 1.00 = US$ 0.0211 December 31, 1977 - US$ 1.00 = Af 43.00 Af 1.00 = US$ 0.0232 EXTERNAL PTM lEBT. Decebiber31, 1977 US$ million Outstanding and Disbursed 1,748.5 Disbursed 911.2 Undisbursed 837.3 Service Payments (1976/77 ) 26.9 Interest 9.2 Amortization 17.7 Debt Service Ratio (1976/77 ) 7.3% IBRD/IDA LENDING, December 31,.1977 US$ million IBRD IDA Outstanding and Disbursed 50.2 Undisbursed 64.8 Outstanding incl. Undisbursed 115.0 A PORTRAIT OF AFGHANISTAN Spring. The nomads have begun to move their sheep from the winter grazing in the plains, into the mountains of the Hindu Kush. The snow has begun to melt and the passes of Shibar and Unai will soon be open. The narrow valleys that follow the rivers of the Hazarajat on their course through the mountains, are alive again. The fields are green and heavy with crops and most of the population of the village are busy keeping the birds away from them. Summer. The wheat has been harvested, and the bazaars are full of fine fruits and vegetables. There are melons from Kunduz and grapes from the Kohdaman valley. The weather is hot and dry, and the cities and roads are choked with dust. It is hard to summon up the energy to do more than visit the chaikhana (teahouse) and go over the day's happenings with friends and the occasional passer-by. Autumn. The flocks and herds are being brought down from the mountains. The land alongside the roads is filled with nomad tents, and their fierce sheepdogs bark at passing vehicles. The fields are being planted with winter wheat and vegetables and there is a rush to finish picking cotton before the first winter frost. With cooler weather,buzkashi is being played again on the northern plains around Mazar and Kunduz to celebrate the many weddings at this time of year.- The villagers and townspeople are stocking firewood in preparation for the long cold winter. Winter. The passes are closed, except for the Salang, but even there it is necessary to clear the road frequently so that the trucks can pass through with their goods for Kabul or the cities of the northern plain. The tourists have left and Kabul airport stands deserted. The nomads have returned to their grazing grounds in the plains of Turkestan and the deserts of the south. The passes are closed and the valleys of the Hazarajat must wait for the spring. - ii - A SUMMARY OF THE DEVELOPMENT STRATEGY i. In 1971 a World Bank mission wrote of the pervasive "disillusion- ment about the past and pessimism regarding the future" in Afghanistan. They concluded that "such pessimism is justified as even in areas where development activities were undertaken, with heavy inputs of capital investment and for- eign advice, returns have been dismally low". Afghanistan was at its nadir. Two years of drought had led to a doubling of wheat prices and large numbers of livestock were being slaughtered. The-balance of payments was in dire straits and the Government requested a moratorium on its debt payments. The mission identified four elements which underlay the critical situation; first, the ineffectual administration and the scarcity of competent officials; second, the inability to "devise or follow an effective development strategy"; third, the poor financial management and inadequate tax effort; and fourth, the failure to manage the external sector so as to provide sufficient incentives for exports. The Report states that "This list could be lengthened. Suf- ficient has been said, however, to show that there are very substantial obstacles to progress and that those responsible for the conduct of develop- ment are certain to be faced with great difficulties in their efforts to proceed effectively and expeditiously. It is clearly impossible to remove all the obstacles in a short period of time". ii. The pessimism of 1971 was not solely a reflection of the weaknesses of the management of the development effort however. There was also a percep- tion of Afghanistan as a country with limited development potential in the longer term. In this respect at least, there is no longer cause for pessimism. In 1977 the economic outlook gives promise that substantial progress can be made in the next ten years towards the goals of higher income levels and meet- ing the basic needs of the population. Let us spell out the changes which have led to this conclusion. In 1971 it was difficult to identify the elements of a growth strategy for Afghanistan. The major emphasis was on the achieve- ment of food self-sufficiency. The tiny domestic market offered little prospect-for industrialization; indeed most of the obvious potentials had been tapped through the large state enterprises which were poorly run and operating at low levels of capacity utilization. While exports did offer some potential, Afghanistan seemed unlikely to be able to compete effectively given its distance from world markets. iii. In the interim major changes have taken place. The harvests of 1972-1976 have made it clear that Afghanistan is indeed already self-sufficient in food in normal years. Increased yields are needed not to insure food self- sufficiency in drought years as well, but to enable valuable irrigated land to be diverted to higher value cash crops with export and industrial poten- tial. Food security can be achieved through programs of imports, domestic procurement and storage, so that the economic impact of the occasional drought year is minimized. The steady rise in prices of primary commodities, has benefitted Afghanistan's exports. The oil price rise has benefitted nearby markets which Afghanistan is almost uniquely well-placed to serve with agricul- tural products. A strategy which is led by agricultural exports, increasingly in processed form, has already begun to take shape. Rising prices for minerals - iii - have made the exploitation of Afghanistan's reserves commercially viable in a number of cases, so that the export drive can proceed along a broader front. The export opportunities are supplemented by good prospects for import sub- stitution of some items. The substantial inflow of remittances from Afghan workers abroad should insure buoyant domestic demand in addition to attractive export markets. iv. This report presents a strategy aimed at exploiting the potentials for rapid growth which are inherent in the new situation. The objective is to achieve relatively rapid modernization, with a wide distribution of the bene- fits, in a manner which is consistent with Afghanistan's unique traditional society, and which is realizable within the constraints imposed by its weak administration. The key to the strategy is the development of an increasing agricultural and livestock surplus which can be processed in part for the domestic market, but even more importantly to supply growing markets in nearby countries. This would be supported by a limited number of well-managed public sector industries using some of Afghanistan's industrial raw materials. The strategy would imply a considerable decentralization of administration, insti- tutions and investment in physical and human infrastructure since growth would be regionally spread rather than concentrated in the Kabul area. It would be supported by programs aimed specifically at meeting the basic needs of Afghanistan's population. V. The strategy for raising output rests on the foundation of a rate of growth of the order of 4 percent per annum in value-added in agricultural production. This would break down as a 2 percent per annum increase in food- grain output and an increase of 6 percent per annum or more in the output of high-value cash crops such as cotton, sugar-beet, fruits and vegetables, and livestock products. The expansion of cash-crop production will permit the development of agro-industries; cotton-ginning and oilseeds, sugar milling, fruit and vegetable preserves and canning, dairy and meat products, etc. It will also allow, as mentioned previously, a very rapid expansion in exports of these products to neighboring markets. In order to achieve this it is essential that Afghanistan pursue a policy of national food security 1/ so that prices for foodgrains relative to other crops remain at levels which permit a modest diversion of the better irrigated wheat lands to these cash crops. Achieving this will depend firstly on a sustained 2.5 percent per annum increase in yields on irrigated wheat lands, and secondly on a program of domestic procurement, imports and storage by the Food Procurement Depart- ment to build up stocks of the order of 200,000 - 300,000 tons of wheat for marketing during drought years (see para. 13.20). Curious though it may seem, the success of a cash crop production strategy is as dependent on the programs for wheat production and marketing, as it is on the detailed programs for the cash crops themselves. 1/ As explained in Chapter IV, food security is not synonymous with food self-sufficiency. The former could include food imports as is proposed in this case. - iv - vi. Higher levels of agricultural production depend in turn on inputs and irrigation. The performance with regard to inputs has been creditable to the point where one can see that the continuation of the present growth and improvement of the institutions providing fertilizer, seeds and credit, will serve the needs in these areas. The weak link in the chain is irrigation. Water is the single most important constraint on Afghanistan's agricultural development, yet it is being wastefully used through the persistence of tradi- tional systems of water management which are not appropriate to modern market- oriented agriculture. The need to increase water availability and to make better use of the water which is there, are paramount to the longer term development of agriculture in Afghanistan (see para. 13.24). vii. The next step in the output strategy is the development of indus- tries which process agricultural output, provide services to agricultural producers and manufacture the consumer goods to be purchased out of increased agricultural incomes. This describes the potential for a wide range of prod- ucts, with small-scale production oriented to local markets; in addition to those mentioned above, examples include farm implements, tractor repair shops, furniture, ceramics, etc. Small-scale local production in Afghanistan is almost by definition the area in which the private sector has a major com- parative advantage. Yet present policies do not give sufficient recognition to the important contribution which the private sector could make in the development of these activities. The confidence of the private sector is at a low ebb. The Plan pre-empts, for the state enterprises, a wide range of products suitable for private production.. Entrepreneurs are harried by arbitrary tax procedures and a general atmosphere of distrust. Small wonder that private investment in manufacturing has slowed down to a trickle. The public sector is not in a position however, to take up the slack. The man- agerial experience which is available in the state enterprises is stretched to the limit by its present responsibilities, let alone the extremely ambitious proposals in the Plan. The enthusiastic response to a scheme recently intro- duced by the Industrial Development Bank of Afghanistan, while only a small beginning in itself, is evidence that a program to foster the development of private small-scale industry in Afghanistan could play an important part in the overall strategy (see paras. 13.28 to 13.31). viii. The development of private industry at this stage of Afghanistan's development represents no threat whatsoever to the primacy of state enterprise. The development of public and private industry is complementary. The worrying thing is that the single-minded pursuit of state enterprises may steer the Government into large-scale, capital-intensive investments which in many cases do not reflect Afghanistan's comparative advantage at this point in time. The diversion of scarce managerial and financial resources to heavy industries and related infrastructure which promise little benefit for the population during the next ten years, must be the subject of careful soul-searching. The Plan is essentially a project list. It contains almost every high priority activity which could be envisaged during the next decade. But it includes many with doubtful economic returns and questionable impact on living standards. The danger is that in the context of shortfalls in external finance and limited implementation capacity, the cuts. will come in the areas of critical importance, -v - while more eye-catching, but less useful projects are retained. This has hap- pened all too often in the past. The Government should take the initiative now, to review the Plan and identify a core of activities which are critical for a broad-based development (see para. 13.34). ix. When that is done there will remain a number of well conceived investments in public industry which merit support; the exploitation of the country's coal and copper resources, and parts of the programs for fertilizer, cement and textiles are cases in point. With the continuing expansion of state enterprise, there must be a serious effort to upgrade management prac- tices, especially as they relate to financial operations (see para. 13.35). A second point to be made about the public investment program is that part of it depends on the export of the products of heavy industry in areas where the neighboring countries which are the natural markets, are developing their own production. It will be necessary to secure long-term trade agreements before investments in these areas are undertaken (see para. 13.72). x. For an optimal pattern of output expansion to take place, the incen- tive system must provide the right signals to producers and investors. The Government of Afghanistan has an excellent record in this respect. The eco- nomy is open, price controls have been kept to a minimum, levels of effective protection are appropriate given the infancy of the country's industry without being excessive, and even the interest rate has been kept at modestly positive levels in real terms. The results have been quite impressive; prices are relatively stable and exports are growing rapidly. There are some worrying signs however. For a number of reasons (see para. 12.02) there has been a substantial inflow of foreign exchange in recent years and a considerable appreciation of the exhange rate. It is now at a level which is possibly damaging to long-term export growth and the exploitation of domestic import substitution opportunities. Some of the factors, such as remittances, earn- ings from unofficial trade and capital flight from neighboring countries, which have contributed to this effect, may not be sustained in the longer term. It is essential to keep the exchange rate under careful review to insure particularly that the promise of an export-led development is not stifled by inadequate incentives (see para. 13.71). xi. One of the most attractive features of the output strategy proposed is that it will bring added employment and income to the population groups which need it most. There should be sufficient 'trickle-down' that the vast majority will be able to meet those basic needs which can be satisfied through the market; food, shelter, fuel and clothing. Other needs must however be met through public distribution systems and the slow progress in these areas at present is a cause for serious concern. The failure of health and education programs to reach the majority of the population reflects in part general ad- ministrative weaknesses, but it is also a consequence of the lack of priority these programs have had in the past and that even within these programs the objective of meeting the basic needs of the mass of the population has not been given its due importance. - vi - xii. The education sector provides evidence of this. The education system is oriented towards formal schooling to prepare students for the next level. It is not sufficiently related to the needs of the community in general, and the rural community in particular. Even the formal schooling is not cost effective. Coverage remains low and there are large numbers of drop-outs and repeaters. The Government is in the process of carrying out a reform of the education system. There can be no disagreement with the objective of this reform which is to make education in Afghanistan more responsive to the needs and priorities of the national development effort. There are grave questions however, concerning the means which have been suggested to achieve this end. For example, it is proposed to increase the average number of years each. student spends in school and reduce the size of classes. This will hardly achieve the expanded coverage which is so badly needed, or make the content of what is taught more useful to the lives of the students. In addition, non- formal education has received short shrift in the new proposals. The program in the education sector needs re-thinking. (see paras. 13.40 to 13.46). xiii. Much of the same limitations are evident in the health sector. The emphasis in health has been on curative medicine - on building better hospitals in the main centers. The few who have access to these modern medical facili- ties return to the same unhealthy environment from which they contracted the disease in the first place. Meanwhile the life expectancy in Afghanistan remains among the lowest in the world, with astronomical rates of infant and child mortality. Preventive measures must be moved to center stage. There is no doubt that sanitation, better nutritional practices and above all, clean water, could achieve a dramatic improvement in the situation. Although a start has been made in this direction, these programs are not yet receiving sufficient priority in either budgetary or manpower allocations. Family planning activities also have an important role to play in improving the health of mothers and children, and merit greater support than they are receiving at present (see paras. 13.47 to 13.52). xiv. In the past, the causes of the inadequacies of the investment pro- gram and the lack of success at meeting basic needs, have been laid at the door of Afghanistan's limited implementation capacity. Resources have not been looked on as an effective constraint. This was probably an oversimpli- fication in the past, but it is certainly not the case in the future. The availability of external assistance will be a factor in carrying out the Plan. A new dimension is likely to be added, however, as a consequence of strains in the domestic resource situation. Sources of additional tax revenue appear limited, while expenditure could, and indeed should, increase rapidly, since current expenditures to utilize existing capacity and carry out social pro- grams are of great importance. If legitimate needs are not to be starved of funds, then new sources must be found. Gasoline, for which controlled prices contain only a very small effective tax element at present, is a major poten- tial. There is scarcely a country which does not exploit this as a source of revenues, and in the case of Afghanistan where higher gasoline taxes would scarcely touch the vast majority of the population, this is a curious anomaly (see para. 13.66a). It is not only gasoline use which is subsidized however. There are a plethora of subsidies covering such items as wheat for civil servants, pocket money for university students, domestic air travel, charcoal - vii - briquettes and many more. Many of these subsidies are given for products or activities which may be expected to expand very rapidly in the medium-term, thus substantially increasing the budgetary drain. These subsidies need to be reviewed and consideration given to withdrawing many of them now, before the political pressures for their retention become too strong. In Afghanistan the incidence of substituting these subsidies by broadened social programs would almost certainly be progressive (see para. 13.66). xv. When all is said and done, it is the capacity of the administration to carry out these programs which will determine the pace of Afghanistan's development. So much has been written about the weaknesses of the administra- tion with so little effect that the reader must judge whether we are brave or foolish to raise the subject yet again. Indeed it must be confessed that part of the mission's confidence in the strategy proposed, is that as compared to the past, it is less dependent for its success on the effectiveness of admin- istration, or is more dependent on the areas of administration in which there are proven abilities e.g. the supply of agricultural inputs. To its credit the Government has often been willing to recognize the limitations and to devise sound policies which do not depend on administrative procedures for their impact. But if there is to be a breakthrough, if the rate of growth is to reach five or six percent in real terms, if basic needs are to be met, then the administration will need to make a far more positive contribution to development than in the past. xvi. Upgrading Afghanistan's administrative capacity will not be an easy task. The salaries of Government officials have fallen by 50 percent in real terms since the mid-60s. This decline has contributed to lower morale and even petty corruption. Increasing opportunities for well-trained Afghan professionals are available outside the country. The main reason to raise salaries however, is not to compete effectively with other opportunities, but to signal to Government officials that they are expected to play a part in the country's development. We regard a substantial increase in government sala- ries as a necessary condition for any advances in this area (see para. 13.55). But not a sufficient condition, however. That will depend on a host of reforms in the system under which government officials now operate, and which prevents even those who are motivated from operating efficiently. These re- forms relate to personnel policies, budgetary procedures, supply management, auditing and so on. Essentially Afghanistan has a traditional civil service system with emphasis on stopping the wrong things from being done, at the expense of getting the right things done. This will not be changed overnight, but there are many areas in which action would provide the basis for the con- fidence and initiative which will be needed for Afghanistan's development (see paras. 13.57 to 13.60). xvii. One particular weakness in the administrative framework relates to the institutions and personnel for planning. Two decades of technical assis- tance in the planning field have produced all too little impact. The Plan is still essentially a collection of projects which depend on the availability of foreign financing for their inclusion. It is regrettable when low priority projects for which aid is available are included in the Plan, yet a critical program like road maintenance is only included up to 1980 because there is - viii - no foreign aid committed for it beyond that date. There are many weaknesses in the planning set-up: The Plan is poorly coordinated with the Budget; the Planning Ministry itself is under-staffed; the Operating Ministries have very weak Planning Departments which carry little weight within the Ministries themselves; there is no place within the system where basic studies on eco- nomic policy can be carried out to provide support to decision-makers; and finally there is a vacuum at the highest levels of economic policy through the failure of the Supreme Economic Council to become an effective entity for taking decisions. Basic changes are needed, not more technical assis- tance (see para. 13.61). xviii. One'strand has consistently emerged from the analysis of problems in every sector the mission has looked at. This is the need for a new emphasis on regional and rural development. In agriculture it is a matter of develop- ing small irrigation structures and feeder roads at the local level, and of giving extension services the incentive and freedom to operate effectively. In industry there is the potential of small local industries and their require- ment of adequate power supplies and transport facilities if they are to suc- ceed. In health and nutrition there is the need to reach the rural population and communicate to them the impact which better practices could have on the quality of their lives. This must be supported by the development of banks, schools and health centers at the local level. The development process must be brought closer to the vast majority of Afghanistan's population. xix. The decentralization of the administrative structure so as to pro- vide financial and manpower resources in the provincial centers is a sine qua non for promoting regional and rural development. In recent years the growth of the Rural Development Department (RDD) has been one of the most encouraging institutional advances on the Afghan scene. The young men who go out into the provinces and live in tents for the two or three months that it takes to com- plete the work on a small project, are the promise of a different future. The system has not yet dampened their -hopes and enthusiasms. There is work to be done. A small culvert is needed here so that the villagers can bring their produce to market. Some minor earthworks are needed there to stop the tradi- tional irrigation structures from being washed away each year. The rural development program can and should become the cornerstone of a new approach to development based on local participation and responsibility (see para. 13.26). xx. The Government of Afghanistan has a heavy responsibility. The con- tinuation of the present living standards cannot be countenanced; that only half of those who are born live beyond the age of 5, and even those only have a life expectancy of 50; that 10-12 percent of the population can read or write; that one-third of the population live in absolute poverty; that in years of drought, widespread hunger visits the land. A commitment to change these things means more than public speeches and impressive Plan documents. It means that solid programs are worked out and that due attention is given to their implementation. We do not ask that "all the obstacles should be removed in a short period of time". We ask for a careful definition of social and economic objectives, and a genuine effort to achieve them. PART I: A VIEW OF THE ROAD I. THE SETTING II. THE JOURNEY SO FAR III. THE ROUTE AHEAD: POPULATION AND INCOME 2- I. THE SETTING A. The Land 1.01 It is Central Asia. The borders of Afghanistan are defined by the countries which surround it rather than its own geographical unity. The peoples and the terrain overlap with the USSR in the north, Iran in the west and Pakistan in the south and east. The northern border follows the Amu Darya River for part of its way along the plains of Turkestan. The villages and grazing lands of the Uzbeks and Turkmans range north from the central moun- tains. In the northeast a curious 180-mile long narrow strip of inaccessible mountains, the Wakhan corridor, forms part of Afghanistan and gives it a tiny stretch of border with China. It became part of Afghanistan in the 19th century by mutual agreement of Tsarist Russia and British India, so that those two adversaries could avoid contiguous borders. The borders with Iran and Pakistan have no natural features to define them and cut across the traditional tribal lands of the Pashtuns and Baluchis. 1.02 Before the opening of the sea route from Europe to India, Afghanistan was an important crossroads. The ancient silk road to China crossed the plains of Turkestan, and the caravan route to India lay across the deserts of the south. Trade brought riches and splendor to the cities of Balkh, Herat and Ghazni. In recent times Afghanistan has become aware of the problems of being a landlocked country, with access to the sea dependent on neighbors who have on occasion in the past refused transit facilities during periods of hostility. The nearest port is Karachi in Pakistan, served by railheads near Quetta and Peshawar. Karachi is about one thousand miles distant from Afghanistan's capital, Kabul. Overland road and rail transport to the Middle East and Europe takes place through Mashad in Iran or three Russian ports on the Amu Darya River. 1.03 It is convenient to divide the country into four major geographic zones: the northern plains; the central mountains; the eastern and south- eastern mountains and foothills; and the southern and western lowlands. In the north of the country lie the plains of Turkestan. Much of this area is relatively low, about 1,200 feet, though the altitude rises rapidly in the foothills which approach the central mountain region. The climate is charac- teristic of Afghanistan, cold winters with perhaps three to four weeks of freezing temperatures followed by variable spring weather with thundershowers and hot, dry summers with temperatures up to 40 degrees C. Annual rainfall seldom exceeds 25 cm. The population is largely Tajik in the large towns such as Mazar-i-Sharif and Kunduz in the central and eastern parts of the plain, and Uzbek villagers and nomads further west. Other groups including Turkmans and Pashtuns are also well-represented, however. 1.04 The plains of the north are separated from the rest of the country by the great ranges of the Hindu Kush. These extend from the Pamir in the extreme northeast and dominate the central and eastern parts of the country. In the central mountains the peaks range from 14,000 to 17,000 feet and even the valleys lie at 9,000 feet. This beautiful inhospitable area is peopled - 3 - by the Hazaras, and the region derives its name, the Hazarajat, from them. That the valleys were once rich and powerful is evidenced by the remarkable Graeco-Buddhist monuments at Bamian, and the minaret of Jam. In the summer months, the nomadic tribes, the Uzbeks from the north and the Pashtuns from the south, bring their flocks into the mountains of the Hazarajat. In the winter the snowline creeps down to about 6,000 feet and the passes of Shibar and Unai are closed for much of the time. The north of the country would indeed be cut off for long stretches were it not for the Salang Pass which was completed with USSR assistance in 1963. 1.05 The mountains of the Hindu Kush seem during the course of history to have represented a challenge rather than a deterrent to the many invaders who used their passes to cross from central Asia to the Indian sub-continent. The passes command the cities and valleys of eastern Afghanistan. The valleys are at elevations of 4,000 to 7,000 feet. Kabul, the capital city, lies in the middle of a string of rich valleys which are well able to support its large population. Jalalabad, which is situated to the southeast at a lower altitude, has a warmer climate. The road to Peshawar and the interior of the Indian sub-continent goes from Kabul through Jalalabad and over the Khyber Pass. Afghanistan's only major forested areas lie in this region. The first of these is Nuristan, the land of light - the name was changed from Kafiristan after its inhabitants were forcibly converted to Islam in the 1890s. Nuristan is inaccessible and ethnically quite separate from the rest of the country. A second region of forests is in Paktia in the south, the heartland of the Pashtun tribal culture-. 1.06 The main roads from Kabul link each of the major regions to the capital. Northwards the road runs over the Salang Pass to Mazar-i-Sharif, eastwards to Jalalabad and Peshawar, westwards an unpaved road runs to Bamian and into the interior, and southwards the road goes through Ghazni and on down to Kandahar and north again to Herat. The last major region, the southern and western lowlands is the largest and comprises the valleys of two major rivers which rise in the Hindu Kush, the Helmand and the Hari Rud, and also the large, sparsely inhabited desert of Registan. Much of this area lies between 1,000 and 3,000 feet. It is far hotter and dryer than the rest of the country and summer temperatures of 45 degrees C are not uncommon. The area is mainly inhabited by Pashtuns. 1.07 A mere description of the regions however, is not enough to give the reader an understanding of how crucial the geography and topography of Afghanistan is to its people and its economy. For that one must see the raging rivers of spring that wash away roads, bridges and canals, yet dwindle to narrow channels or a series of unconnected pools by autumn. One must see the narrow valleys of the Hazarajat, with every inch of their floor under crops and the rocky mountainsides being crossed by small flocks of sheep and goats. One must see the deserted ruins of Bost in the dusty plains south of Lash- kargah. Perhaps most of all one must see the Hindu Kush and among those snow- covered peaks, recall that fierce, gentle ruler, the Emperor Babur who called Afghanistan the theater of heaven. -4- B. The People 1.08 Afghanistan is 250,000 square miles in size, about the size of Burma or the state of Texas. Its population is perhaps 14 million, of whom roughly 10-10.5 million are settled villagers, 1.5 million are nomads and 2.0-2.5 million live in urban areas or in the smaller market towns. The population is made up of a number of different tribal groups; it is officially estimated that the largest single group is the Pashtuns, followed by Tajiks, Uzbeks, Hazaras, Turkmans and a variety of other groups. There are wide variations in racial characteristics and it is not possible to generalize these into an Afghan stereotype. There are a number of unifying features however, beyond those of a common territory and government. Thus the population is almost entirely Muslim with almost all groups other than the Hazaras being Sunnites. There are two dominant languages, Pashtu and Dari, and one or other, or often both, are spoken by most of the population. There are many other common features related to the way of social and economic life in the thousands of villages that dot the countryside. 1.09 The basic unit of Afghan life is the village, of which there are about 20,000. Even the nomad camps can be viewed as moving villages. Single villages may range in size from as few as 10 farming families to as many as 500. It is not possible to identify a typical size within this range, though perhaps the largest number of villages would fall into the range of 40 to 80 families. The villagers are linked by ties of marriage and kinship. There are three important 'officials' in the village who are chosen by the inhabit- ants. The first of these is the malik or headman of the village. He is responsible for the dealings of the village with the government or outsiders. The second is the mullah who leads the religious life of the village and instructs the young in the religion. The third is the mirab or water master who organizes the village irrigation system and the work which must be done to keep it in operation. These village leaders are extremely influential and their support has been in the past, and will continue to be in the future, the key to any constructive changes in the village environment. 1.10 The village economy revolves around land and water. About 60 per- cent of the land is farmed in holdings of under 20 ha each. These constitute 98 percent of all farms, including 40 percent which are less than 0.5 ha. Approximately half of the landholdings are too small to provide a living and their owners must supplement their incomes. This might be done in part through livestock, handicrafts and trade, but in most cases would mean taking employ- ment as casual laborers and sharecropping on larger farms. Sharecropping in Afghanistan takes two forms: either the sharecropper supplies only his labor and receives one fifth of the crop, or he provides inputs such as seed, imple- ments and draught animals, and receives one half of the crop. Such arrange- ments are an obvious disincentive either to investment by the landlord, or the use of more costly inputs such as chemical fertilizer by the sharecropper. Another problem related to landholding in Afghanistan is that of fragmenta- tion, which results from the laws of inheritance with prescribed shares for all the surviving family members. The absence of an adequate system of recording land titles results in frequent, and other violent, disputes over land ownership. -5- 1.11 As in many other arid countries, water is the key to life in Afghanistan. Of the country's area, only about 12 percent is cultivated, mainly because of the shortage of water. About one sixth of the cultivated area is dry-farmed land on which wheat and barley are grown, but in drought years such as 1970, '71 and '77, production on the dry land is negligible. For the irrigated land, water is drawn off directly from the rivers where the land is fairly level as in the northern plains. In other areas however, a remarkable traditional irrigation system, the karez, is used. The karez is an underground tunnel which intercepts the rising water table as the land slopes upwards away from the river bed. When the water flows out, the tradition is that the users upstream have priority over those downstream - an allocation system that has the virtue of ease of administration if not those of equity or efficiency! 1! 1.12 Moving from the economic life of the village to its social life, it is important to impress upon the reader that Afghanistan remains a very con- servative, traditional Muslim society. Nor is there evidence that outside of the 700,000 inhabitants of the capital city, this is changing or breaking down. The economic developments of the past two decades have either left the villages untouched or have been consistent with its social traditions. But this will not always be so. The Government's present plans for implementing land reform, proposals for rationalizing water use, increased educational facilities partic- ularly for women - all these represent a challenge. For most of the villagers or those who live in the small towns however, change seems far away. Indeed change itself is not a concept which is really assimilated into the Afghan con- text. Notions of progress towards higher living standards are confined by the needs and values of the village. To an Afghan farmer better life may mean more wives, more sons, a larger living area'with carpets on the floors and perhaps better clothing and a transistor radio. Since no villages have electricity and few are linked to motorable roads it is understandable that the horizon should be so limited. 1.13 Perhaps the key is lack of education. Only 10-12 percent of the population of Afghanistan is literate and in many villages only the mullah of the older generation will be able to read or write. Of the children of primary school-going age about 30 percent attend school and in all areas other than Kabul province only 25 percent. Of girls of primary school-going age less than 9 percent attend school and in areas other than Kabul province only 5 percent. There is as yet little awareness that it is not simply the will of God that 50 percent of children should die before the age of 5 years, or that even those who attain that age only have life expectancy of 50. These figures probably represent an improvement over the past, yet not enough so that there would be awareness of change. For the most part, life in rural Afghanistan is much the same as it would have been centuries ago. 1.14 "The village of Ri-Jang lies about 20 kilometers south of the large city of Mazar-i-Sharif in northern Afghanistan. It comprises 224 inhabitants living in 42 households. Its existence centers around agriculture which is at 1/ This tradition does not follow Islamic law. The spirit of the Shariat is that water should be allocated according to acreage of arable land. - 6 - the mercy of the rains. In years of poor rainfall, their wheat crop is only half the average, in good years double. The village receives little water from streams and the little it does goes to satisfying personal needs and irrigating small personal orchards and gardens. In a typical year over 65 percent of total income is from dry-farmed wheat, about 23 percent from live- stock, 2 percent from the irrigated gardens, and the remainder from casual labor. But income and wealth in Ri-Jang are distributed very unequally: the wealthiest 8 families own 78 percent of the goats and sheep, 65 percent of the land and earn almost 65 percent of the total income; while the poorest 22 families own less than 5 percent of total goats and sheep, only 13 percent of the land, and earn only 15 percent of the total income. Although only 3 families own no land at all, all of the poorest 22 families cannot make enough to subsist on from their own land. Hence more than half the wheat they produce is from sharecropped land. They are also forced to supplement their incomes by hiring out their labor, and by carrying snow in the summer and bushes in winter down to Mazar-i-Sharif on the donkeys most of them own. Almost half their income comes from these sources. Health in Ri-Jang is poor: 38 of the 42 households drink heavily polluted water that flows through the village in an open canal, and 4 households eat meat less than once a week. When a foreign doctor visited the village, 129 people came to him, many with several ailments. More than 10 percent were anemic, 15 percent had major digestive ailments, 15 percent had respiratory problems (4 had TB), and more than 20 percent (mostly children) had conjunctivitis. Only 20 people in Ri-Jang are literate, includ- ing only I woman. There is a village school for boys the villagers themselves paid to build and staff. The school now stands empty - villagers are disillu- sioned with the school system that they felt tried to get their children to leave the village for the city and didn't teach children to read and write nearly as well as the mullah did." 1/ 1.15 Muheb Ali is a farmer. His village, Alchin, has about 40 families and is situated 10 miles west of Bamian in the Hazarajat. He owns 4 jeribs of land (about four fifths of,a hectare). The land is irrigated with water from the river that runs through the narrow valley and he grows a single crop of wheat on it, which yields 30 seers (about 210 kilos) in total. He uses this wheat entirely for subsistence consumption by his family which consists at present only of his wife and 25-year old son. He has four married daughters. Another five children have died. He owns a metal-tipped plough which he pur- chased two years ago for Af 450, and a pair of oxen each costing Af 8,000. In addition to his land he also owns a small flock of 35 sheep and 4 cows. His son takes the sheep into the hills to graze. In addition to the produce which the family obtains from the sheep and cows, he sells four or five of the sheep (receiving about Af 1,000 for each) each year. He once owned a donkey, but it died. Muheb Ali uses no chemical fertilizer on his wheat and has never been visited by an agricultural extension officer. His son never went to school and he has never visited a hospital or been beyond the town of Bamian in his life. 1/ Source: CINAM, Services for Children within Regional Development Zones - Research and Action. Experimental Activities at the Village Level, Vol. II Monographs. UNICEF, Kabul, July 1973. -7- 1.16 Leaving the village, the logical destination is the market town. Into this composite category may be grouped any village with a number of stores selling essential consumer goods such as tea, soap, batteries, matches, etc., and of course invariably two or three of the ubiquitous chaikhanas, the tea- houses which almost every Afghan male who lives in reach of one frequents at some point on any given day. These often consists of rugs stretched out over an elevated verandah with a canopy over them for shade. At the extreme end of the range of market towns one may indeed include all the cities other than the capital. Even in these it is the case that only the main street is paved and has street lighting and stores. 1.17 Khanabad is a small town situated in a rich agricultural area of the northern plain along the river of the same name. It has a population of 5,000- 10,000 and is an important market for farmers from the surrounding area as well as larger traders. Khanabad hasn't a single paved road and also has no piped water. An impressive new mosque is being built along the main street. Twice a week Khanabad is the scene of a grain market, which is the largest in the area. The bazaar where the market takes place is dusty but reasonably clean. The bazaar licensee who pays a rental to the Government has put up some neat stalls for the use of traders. Most of the farm products which Afghanistan produces are available at the bazaar. In the center is a curious circular double storey building. The top floor serves as a chaikhana and there are stalls on the bottom. A loudspeaker spreads the sound of a cassette tape recorder playing some local popular music, throughout the bazaar. 1.18 Abdel Aziz is a trader at the Khanabad bazaar. He sells sesame seed oil for cooking. He owns a small mill and buys the raw seed. His mill is not electric and he owns two horses to turn the millstone. He buys the seed for Af 100 a seer (7 kilos). From this he gets only a quarter seer of oil from the seed which he sells for Af 80, but in addition he can sell the leftover seed-cake for Af 50. Perhaps a half seer of oil would represent the scale of his daily operations, so that his earnings are about Af 60 a day. On this amount he must keep his wife, his two sons and two daughters. His son, in his late twenties helps him in the shop and is able to keep some record of his business. None of his children have been to a formal school, but his son learned to read and write through the mullah. Why is his son not yet married? The cost of the dowry for a wife is presently about Af 50,000 and he cannot afford it.. Surely he could use the money from the marriage of his daughters to pay for the marriage of his sons. "Ah, who will marry the daughters of a poor man"! 1.19 By the standards of many other countries Kabul would be a small prov- incial town. For Afghanistan it is the metropolis. Kabul has paved streets, hotels, restaurants, parks, palaces, department stores. It has about 80 per- cent of Afghanistan's automobiles, and about 80 percent of the country's doctors, to cite just two indicative figures. Kabul's population is modern and sophisticated. In the villages the women wear long, loose dresses which are modest but practical for the fields. In the small towns they wear a loose fitting garmet which covers them from head to toe called the chadri, if indeed they venture outside at all. In Kabul many of the women wear jeans or western clothes. - 8 - 1.20 Abdel Karim is a member of the civil service. He presently holds the rank of a General Director in a Ministry, at a salary of Af 4,200 a month. This salary is far too low for him to make ends meet in Kabul even though it is supplemented by a subsidy for purchase of flour. Fortunately he comes from a wealthy and large family which owns considerable land so that he is not dependent on his salary for living. His father died a few years ago and he is now the head of the family. He has built a large house at a cost of nearly Af 1 million in Shar-i-nau (the new city), the most modern and fashionable suburb of Kabul. He has a car, but the house itself is sparsely furnished - mainly large numbers of carpets on the floor and cushions for reclining. The large reception room for guests has an airconditioner however. He has only three children, and does not plan to have more though he comes from a family of six. He married when he was 16 and his wife 15 and met for the first time at their wedding. He did graduate studies overseas and has ambitions to return overseas at some later point of time to continue his studies or take up employment. 1.21 The final population group which needs to be described, and perhaps the most fascinating, is Afghanistan's population of 1.5 to 2 million nomads. The majority of the nomads are Pashtuns though there are also groups of Turk- mans, Uzbeks and Baluchis. They move from winter grazing in the plains and lowlands to summer grazing in the foothills and the Hindu Kush. They travel in groups with their flocks and tents, stopping for a few days at a time at traditional camping grounds. Over time an interdependence has developed between the nomads and the sedentary population in the rural areas. In the past nomad traders brought with them kerosene, matches, cloth, sugar, tea and spices. Now their trade is largely confined to livestock products. In ex- change they get grains, fruits and vegetables from the farmers. They also provide farm labor during th~e peak seasons of the year and the wealthy nomads are important moneylenders and landowners. During recent years an increasing number of nomads have purchased land and created a home-base for themselves while still continuing on their annual journeys with the flocks. A caravan of nomads is a stirring sight - so it must have been in the days of Genesis. Development economics has little advice to offer on the question of how to improve the lot of the nomad, short of destroying a unique way of life. 1.22 It is oversimplified, but nonetheless useful to think of Afghanistan at present, in terms of two societies - a traditional one for the 85 percent of the population who form part of the rural economy and a modern one for the 15 percent who live in the towns. There are however, increasing links between these two sectors as the Government pursues its objectives of expanding the modern economy. There is the rapid spread of nontraditional education to the rural areas, increasing health facilities and disease eradication, cash-crop production stimulated by the effects of government agencies for the distribu- tion of seed, fertilizer and credit, improved communications through roads and the ubiquitous transistor radio. Looked at from the standpoint of the towns and the modern sector these changes appear minimal, but from the standpoint of the village they sometimes appear rapid and unsettling. -9- C. The Structure of the Economy 1.23 If one combines agriculture, livestock, handicrafts and rural trade under the heading of the traditional economy, then 85 percent of the population of Afghanistan (including the nomadic population) would probably be primarily dependent on these activities for their livelihood. The rest would consist mainly of the government administration, the industrial sector, urban trade and tourism and the transport sector. Total GNP in Afghanistan in 1976/77 was of the order of Af 115 billion which translates to GNP per capita of Af 8,200 or about $180. Sectoral breakdowns of Net Domestic Product and the economi- cally active population is shown in Table 1 below: .Table 1: NDP AND ECONOMICALLY ACTIVE POPULATION (1975/76) No. of Persons Af % of Employed % of billion NDP ('000) Total Agriculture and Livestock 53.81 55.4 2492.8 52.9 Handicrafts 7.70 7.9 843.6 17.9 Industry and Mining 3.40 3.5 40.7 0.9 Construction 2.17 2.2 44.7 0.9 Transport and Communications 3.46 3.6 56.6 1.2 Commerce 11.82 12.2 257.3 5.5 Services 8.64 8.9 691.6 14.7 Other 6.09 /a 6.3 282.7 /b 6.0 TOTAL 97.09 100.0 4710.0 100.0 /a Includes housing. /b Includes unemployed which amounts to 2.7 percent of the total labor force. Sources: Ministry of Planning, Afghan Demographic Survey (ADS): National Demographic and Family Guidance Survey of the Settled Population of Afghanistan, and Mission estimates. 1.24 Agriculture constitutes the major economic resource providing a source of living for the majority of the people and contributing over 55 percent of NDP. Only about 12 to 13 percent of the land is cultivable, of which half is cropped each year, while as much as two thirds of the coun- try provides some winter and summer grazing. Only 3 percent of the land is classed as forest. Two thirds of the cropped land is irrigated and accounts for the greater part of production. Wheat occupies most of the rainfed arable land giving average yields of only about 0.5 tons/ha but there has been com- plete failure of the crop in drought years. About 50 percent of the irrigated land is under wheat and a further 30 percent under maize, rice and barley, with the balance mainly cropped with fruits and vegetables, cotton, oilseeds, sugar beet and forage legumes. Average yields are low, as little improved seed is available and chemical fertilizer is applied to only about one eighth - 10 - of the irrigated land. As discussed in para. 1.10 above, the overall farming pattern is of very small holdings typically of 2 to 4 ha though-many are under 0.5 ha and their owners have to supplement their incomes by working as laborers or sharecroppers on larger farms. A million oxen provide practically all draught power on the farms, averaging about one animal to a holding. Larger farmers, who are finding casual labor less readily available than in the past, are increasing mechanization though as yet there are only about 3,000 tractors in the whole country. 1.25 Animal husbandry in Afghanistan is almost entirely taken up with extensive pastoral management of flocks of sheep and goats, with cattle main- tained in the irrigated areas primarily to provide work oxen. Thus livestock of some kind are to be found on practically all farms, large or small, and in total contribute about a quarter of agricultural NDP. While husbandry tech- niques are well adapted to the harsh environment, productivity is low as facil- ities for disease prevention and parasite control are lacking. The general low level of nutrition with inadequate supplementary feed, due to primitive methods of fodder conservation and the acute shortage of standing feed in winter, results in high mortality rates especially among sheep and goats. The national livestock population is estimated at about 20 million sheep and goats, of which about 25 percent are Karakul and 20 percent are goats, and 3.5 mil- lion cattle. Donkeys, horses, mules and camels, on which farm transportation and the movement of the nomadic population are dependent, make up another 2 million head. 1.26 Handicrafts play an important role in the Afghan economy, contri- buting about 7 to 8 percent of NDP and employing about 18 percent of the labor force - substantially larger shares than modern industry and mining. About two thirds of the handicraft workers are women. The major types of handicrafts are carpets and rugs, embroidered textiles and leather goods, wood and stone carvings, ceramics and jewelry. Of the various types of handicrafts, carpets and rugs are the best known and the most important; they are hand-woven and their traditional tribal designs have in recent years found a great deal of favor in western markets. Carpets are woven on simple wooden frames by the women and children of nomad tribes or villages. Much of the work is done during the long winter and the income forms an important supplement to the family's other earnings. The potential earnings from carpet-weaving are often a substantial consideration in the dowry which must be given to the bride's family. The market for many of the traditional crafts is increasingly abroad and this is likely to imply a greater emphasis on quality materials and finish than in the past. 1.27 Although the first private industrial enterprises were established in Afghanistan during the 1930s, the majority of undertakings are of recent origin, and a high proportion were set up in the period between 1965 and 1972. There are now about 130 'medium-scale' establishments, employing about 10,000 persons. In addition there are a large but unknown number of artisans in Kabul and the other major towns. Private industry is concentrated in the production of-light consumer goods for the domestic market, mainly cotton and rayon textiles, leather and footwear, pharmaceuticals, food and beverages. In 1975 the major commercial bank, Bank-i-Melli was nationalized, with the result that - 11 - a number of private enterprises in which it had a majority shareholding became part of the public sector. The nationalization, combined with uncertainty about the post-1973 Government's attitude to private enterprise, has contri- buted to a marked slow-down in the pace of new private investment in the industrial sector. 1.28 The present constitution reserves heavy industry for the public sector. A number of state enterprises or tasadys were established in the late-50s and early 60s. These include enterprises producing cement, engineer- ing products, sugar and textiles. More recently there has been a major investment in fertilizer production. The state enterprises were set up at a time when the indigenous managerial base was extremely weak and progress in this direction has been disappointing. Thus there is practically no state enterprise which keeps meaningful and up-to-date financial accounts and as a result assessment of their performance and delegation of control to their management has not been implemented effectively. The public sector industries account for a disproportionately large share of industrial investment and a disproportionately small share of industrial value-added and employment. 1.29 Mining in Afghanistan is entirely in the public sector. The major resource which has been exploited so far is natural gas. The gas has been developed with Russian assistance and most of the annual production is piped to the Soviet Union. Afghanistan currently earns about $50 million a year from these exports. The natural gas is also being used for fertilizer produc- tion. Exploration for petroleum is proceeding though success has been limited to date. Afghanistan has substantial coal resources of which only a small amount has so far been tapped. Coal represents a major potential but serious managerial problems will have to be overcome first. There are also large deposits of iron ore located at Hajigak in the Koh-i-Baba range at altitudes of over 12,000 feet. The exploitation of these will depend on the feasibility of large-scale mining and transportation given their inaccessibility. There are copper deposits at Ainak which also have considerable potential. Both Hajigak and Ainak are presently at the study and design stage. 1.30 The transport system consists mainly of the road network. Consider- ing Afghanistan's rugged terrain and climatic extremes, which result in very high costs of construction, the primary road network is relatively well devel- oped although some areas remain to be covered. The highway system links the main agricultural areas and population centers through circling the central mountains, and linking Kabul with Baghlan and Mazar-i-Sharif in the north, Kandahar in the south and Herat in the west (see Map No. IBRD 13204). Outside the main roads however, the quality of the system falls away rapidly - the huge central region of the Hazarajat does not have a single paved or all- weather main road for example, and consequently is inaccessible for much of the winter and spring. Domestic civil aviation is very limited but nonethe- less serves a useful purpose in providing access to certain remote areas with poor or non-existent road connections. No railways exist because the moun- tainous terrain makes construction too difficult and expensive, while the volume of bulk products for long distance hauls is not significant at present. - 12 - 1.31 Other forms of physical infrastructure are not highly developed in Afghanistan at present. Electricity consumption per capita is among the ten lowest countries. About 5 percent of the population has electricity for domestic use, and even then, in many cases supply is confined to certain hours of the day. There is virtually no electrification in the rural areas. Total capacity is 318 MW, 60 percent of it in the Kabul area. Over 90 percent of the present system is based on hydro resources. Piped water supply is simi- larly confined to the urban areas and the proportion of the population served by these is similar to the 5 percent for electricity. Indeed for the most part these groups are the same and over half of them are in the capital city. With regard to communications, there are about 26,000 telephones in Afghanistan (less than 2 for every 1,000 persons) and about 300 post-offices. 1.32 The availability of trained manpower has been and remains one of the major constraints to Afghanistan's economic development. There are shortages of trained manpower in many skill categories as well as for most middle and higher level technical positions. In some areas such as accounting there are virtually no trained local personnel available and training has only just commenced. Kabul University has an enrollment of about 12,000. It does not offer post-graduate training, but a large number of Afghans have received such training abroad. Many of these, however, have taken up employment elsewhere, partly in response to the very low salaries offered in government service in Afghanistan. Since 1974 employment opportunities for all categories of workers, 'unskilled, skilled and professional, in Iran and the Gulf countries, have led to a further exodus. It has become not merely a question of how to train adequate numbers of Afghans, but also how to motivate them to remain and participate in Afghanistan's development effort. 1.33 In addition to looking at the economy through snapshots of the major sectors it is useful to analyze it in terms of categories of expenditure. In- evitably such an analysis is heavily dependent on the availability of reliable quantitative information. While information on the public sector and the ex- ternal sector is reasonable, any quantification of private sector activities is pure guess-work. There is sufficient qualitative and partial information however, to enable the judgment to be reached that the levels of investment and savings in Afghanistan are well below those of other countries with com- parable levels of per capita income. A possible conformation of expenditure is shown in Table 2 below. Table 2: EXPENDITURE ON GDP (%) 1975/76 Total expenditure on GDP at market prices 100 of which: Private consumption 86 Government consumption 6 Gross investment - Private 4 - Government 6 Exports of goods 12 Less Imports of goods -14 - 13 - 1.34 Private consumption is determined as a residual in Table 2, and its level therefore is of little interest. Something can, however, be said about its composition. Thus about 60-65 percent of expenditure on private consumption is for food, of which approximately one-third (i.e. 20 percent) is probably in the form of subsistence production. Of the remainder, fuel, particularly firewood, is of great importance in Afghanistan's climate and probably matches the share of clothing, each being around 8 percent of the total. In the larger cities of course there is a wide range of imported consumer goods available for the middle class. In the smaller towns and villages however, the local trader generally carries a limited list of items; kerosene lanterns, cigarettes, matches, soap, aspirins, batteries and perhaps transistor radios, paper, pencils and pens, metal utensils, etc. 1.35 While the level of gross investment in the .private sector is not much below that of the public sector, the difference would probably be more marked for net investment. A high proportion of private investment is for maintenance; house repairs and maintaining irrigation channels. Net invest- ment consists of the tiny medium and small-scale industry sector, a small amount of farm mechanization, the purchase of trucks and heavy vehicles, some small onfarm improvements, the planting of orchards, and fattening of sheep and goats and expansion of flocks. The total net investment has prob- ably changed little and may even have fallen since the late 60s, although the official series suggests an increase. The low level of private investment does not appear at this point in time to reflect a shortage of investible resources in the private sector. Increased money incomes in the rural sector in recent years have not flowed into investment, but have either been spent on a limited range of consumer items or have been hoarded. Bank deposit rates of 8 percent (slightly above the rate of inflation) have failed to attract income earners to transfer their resources to the financial intermediaries. Yet the riddle is that these same farmers respond rapidly to changing incentives embodied for example in the relative price ratio between wheat and cotton, and that moneylenders, who charge usurious rates of interest, thrive in the rural areas. It is possible to identify two sources of the reluctance to invest or to save in financial form. First is the lack of awareness of potential opportunities and the return from exploiting them. This is traceable to the weakness of the educational effort, the shortfall in all forms of extension and the limited reach of the media - in short the failure to communicate the potentials to the population at large. A second problem which deters even those who are aware of the potentials, is that the average villager or townsman sees little tangible benefit from involvement with government-related officials and agencies. Clearly these two points are not unrelated - effective education and extension by honest and competent government officials will be a primary component of building confidence in the Government and its intentions. 1.36 The distinction between government consumption and investment in Afghanistan is less important than in many developing countries. It could be argued that the current components of expenditures on education and health have a greater developmental impact than anything in the investment program. Only 10 percent of total government expenditure goes for current expenditure on education and health, representing less than 2 percent of GNP. Nor are other - 14 - components out of line for a country of Afghanistan's size and income level. It is apparent that increases in current expenditure will be critical to the future development effort. 1.37 Much the same observations could be made about government investment. The level of this investment has depended very largely on the availability of foreign assistance and Afghanistan's capacity to absorb it in the form of in- vestment projects. For much of the past, the availability of foreign aid seems to have been slightly higher than the capacity to use it for projects yielding acceptable returns. The sectoral composition of investment has also depended on donor interests, though the Government has had some influence in this area. Thus there was emphasis on infrastructure and public industry in the late 50s and early 60s, which shifted somewhat to agriculture in the subsequent period. Frequently, however, the investment Plans which have been prepared, often with foreign technical assistance, have not been adhered to because of the absence of well prepared projects to give content to the good intentions. Because of the lumpiness of major projects, the composition of investment varies consider- ably from year to year. On the average however, it probably comes close to a structure of three equal parts: agriculture and irrigation; industry and mining; and transport and power. Other sectors would account for perhaps 10 percent of the total. 1.38 Perhaps the most salient feature of the fiscal system in Afghanistan is its small size. The tax to GNP ratio is 7 percent, nearly the lowest in the world. Adding in other domestic revenues does not change this picture. Notwithstanding the minute quantity of resources mobilized, the Government consistently runs a current account surplus which is used to finance develop- ment expenditure, although well over two thirds of such expenditure is funded through foreign aid. As a consequence ordinary expenditures are also extremely low and, as mentioned above, there is a grievous shortfall in providing the most basic public services such as control of communicable diseases or primary education. Over two thirds of all taxes are on foreign trade, an extremely high ratio. The country is also extreme in its fiscal centralization. The provinces have no tax authority and no budgets, and the resources marshalled by the 87 administrative units classified as municipalities are very meager, less than 1 percent of GNP. Notwithstanding the leading role of state enter- prises in the modern economy, they contribute very little to the public revenues. Actually their subsidization may have exceeded their transfers to the Government - as mentioned in para. 1.28 the state of accounting is so poor that it is difficult to reach a clear conclusion on this. 1.39 Banking in Afghanistan is inchoate. There are three commercial banks and three specialized banks, all publicly owned. The central bank's (Da Afghanistan Bank) activity is largely limited to management of the stock of money and of the government accounts as well as limited intervention in the foreign exchange markets. Commercial banking is extremely centralized in the capital. Although branches exist in the provinces, their functions are very limited. In many towns their chief activity appears to be that of pro- viding a safe place for holding funds. All loans are made in Kabul. In - 15 - spite of an early experience with investment banking, most bank credit is short-term loans. Of the three specialized banks the Agricultural Development Bank of Afghanistan is perhaps the most dynamic. It has provided tens of thousands of fertilizer loans in financing the Government's effort to introduce new inputs into agriculture. Given the rudimentary nature of formal banking, it is not surprising that the bazaar money traders, and above all those of Kabul, play a major role particularly in financing foreign trade. They may account for nearly two-thirds of annual turnover in foreign exchange. In addition the bazaars finance consumer loans, working capital, housing and other construction, and even longer term industrial undertakings. Possibly, bazaar intermediation is a more important source of finance than the formal institutions. 1.40 Turning to the external sector, the share of trade remains less than 15 percent of GNP. In some ways even this figure overstates its role in the Afghan economy. Afghanistan has never been a major supplier of cash crops or minerals to foreign markets in the way that other countries of comparable size such as Sri Lanka, Malaysia or Chile have been. Neither its modern sector nor its infrastructure evolved to supply primary products to foreign markets. It has been a traditional crossroads of trade routes and even today it plays an entrepot role with respect to goods which are imported and then re-exported, often illegally, across the long borders with Iran and Pakistan. Its import needs for consumption have been limited in the past - textiles, tea, sugar and petroleum have been the main items, and there has often been a perception of exports as being convenient means of disposing of surplus domestic production rather than an intrinsic feature of the economy. 1.41 Afghanistan has developed a fairly diversified export structure. A number of agricultural products are exported; fruits and nuts, ginned cotton, karakul pelts. These comprise about 60 percent of the total. Handicrafts comprise about 12 percent of which two thirds takes the form of carpets and rugs. A further 12 percent is accounted by natural gas exports to the USSR and the balance of 16 percent covers a large number of smaller items. With regard to imports the four major items cited in para. 1.40 above, still com- prise over 50 percent of the total. Capital goods, related to projects and financed by foreign aid, account for about 20 percent of the total. All these figures however, reflect the official trade data. The long rugged borders, crossed by traditional tribal grazing routes, make smuggling almost inevitable when relative prices between Afghanistan and its neighbors get out of line. Various narcotics control agencies have also claimed that there is smuggling of drugs out of Afghanistan at present. 1.42 Although there is a chronic recorded trade deficit, in practice the Afghan economy has been able to finance this through aid inflows averaging about $65 million a year and substantial remittances from workers employed since 1974 in Iran and the Middle East. The result has been a buildup of reserves to about 80 percent of the annual import of commercial goods (i.e. excluding imports under aid). The Government has followed a very conserva- tive approach to financing investment in the past and has rarely allocated its own foreign exchange when there has been a prospect of securing aid for the pur- pose. This approach had its roots in the pessimistic outlook for Afghanistan's - 16 - balance of payments, which prevailed prior to 1974, and also the necessary association of foreign donors in the technical assistance effort which remains a major feature of projects in Afghanistan. 1.43 No review of the economy of Afghanistan would be complete without some reference to the role of the Government in economic management. Until 25 years ago, traditional Afghanistan was a society in equilibrium. High birth rates were matched by high death rates. In good years there was food for all and more, in bad years scarcity and occasionally starvation. There was little migration from the rural areas. The traditional sector produced enough agri- cultural products and handicrafts to insure an adequate supply of the major imports - tea, sugar and textiles. In 1953, the then Prime Minister Mohammed Daoud Khan ushered in a new era in Afghanistan, by essentially introducing the notion that the Government was responsible for transforming Afghanistan into a modern society. Although Afghanistan remained a mixed economy, the motive force was clearly perceived to be the state. 1.44 The state is of course an abstraction. Its practical embodiment is the political leadership and the government administration. The administra- tion had previously been little more than the staff of the King and the Prime Minister. It would have been impossible to have turned it into a modern development administration overnight and the initial steps in development had to be taken largely through foreign assistance. This assistance was partly financial and partly through a substantial technical assistance contribution, quite possibly the largest undertaken-in any country which did not have a colonial association. In subsequent years, the administration was gradually upgraded and has taken over many of the tasks performed by foreigners pre- viously. The administration remains however far from what would be implied by the need for a coherent, well administered development effort, and the input from foreign technical assistance remains very large relative to Afghanistan's size and resources. 1.45 Afghanistan can be characterized as a mixed economy. The tradi- tional economy is of course totally private, but the modern economy is domi- nated by the state. The major industries, other than textiles, are publicly owned and managed; the banks, much of the tourist industry, certain major trade items, etc. are all in the public sector. Even in agriculture, some state farms have been established with assistance from the USSR. But the role of the state goes further even than that. Education in Afghanistan is highly subsidized and this applies to all levels. The graduate is in a sense com- mitted to the public sector after qualifying and even more important, the state is committed to finding employment for him or her. There is an implica- tion of people being drawn out of the traditional private sector and recruited into the modern state sector. 1.46 There is a constant tension in Afghanistan between the very great responsibility that has been given to the government administration in running the modern economy, and the ability of both the personnel and the system in which they operate to provide the quality of service which is needed. A number of examples will indicate what is meant. Large-scale modern industries need proper financial management, but there are no trained Afghan accountants and - 17 - thus none of the public enterprises is able to produce meaningful and timely financial statements. The system of auditing is geared entirely towards con- trol in the narrowest sense of the word. Thus recently a Government official found that he could not secure labor at the officially stipulated wage rate so he took the initiative of exceeding the out-of-date guideline and was thereby able to finish the project ahead of time and well under the total budgeted cost. He was promptly reprimanded for exceeding the officially stipulated wage rate. Other classic examples relate to the system of warehouses for government stores which are operated by a bonded store helper, the tahwildar. If the tahwildar is sick or out of town there is no way an item can be released from the stores no matter how urgent. Stories are commonly told of tahwildars who are in jail and have to be solemnly marched over from the jail whenever anything is needed from the store. These examples could be multiplied. 1.47 While there is a small group of well-trained and able government officials, the majority of Afghanistan's civil servants are underqualified for the tasks of development administration. Civil servants are paid scarcely enough to make ends meet and despite the rigid control system, petty corruption is rife. There is little capacity to prepare or for that matter to implement projects and heavy reliance is still placed on the three to five thousand foreign technical assistance personnel in the country. As in most countries there is a great deal of talk about upgrading the administration and changing the administrative system. Again, as in most countries, the forces which keep the status quo in its place have proven overwhelming. In many other countries however, this is far more marginal to the capacity to develop. In Afghanistan because of the development strategy which is being pursued, the weakness of the public administration is the major determinant of the pace at which development can take place. - 18 - II. THE JOURNEY SO FAR A. Afghanistan's Political Evolution 1/ 2.01 Much of the past is the story of invasions. The deserts of the southwest and the mountain passes of the northeast commanded the rich plains of the Indus and the Ganges. Successively the Greeks, Mongols, Moghuls and Persians dominated much of the area of present day Afghanistan. A convenient starting point in the story is the movements of Aryan peoples some 3,000 to 4,000 years ago from central and western Asia onto the Iranian plateau and into the India sub-continent. The people and languages of modern day Afghanistan are largely descended from these groups. 2.02 The Aryans established a major center at Balkh in the north. The area around Balkh, known as Bactria, was incorporated into the empire of Cyrus the Great in the sixth century B.C. It was the birthplace of Zoroaster. In 331 B.C. Alexander conquered and occupied the area. The lands to the north and west of the Hindu Kush were ruled by Greek-descended governors till about 50 B.C. The southern and eastern areas however were conquered by the Mauryas, the Buddhist rulers of much of India. The result was a curious fusion of the two cultures which produced among other things, the astonishing Graeco- Buddhist figures of the Bamian valley. In the middle of the first century B.C., a nomadic Aryan tribe from Central Asia, the Kushans invaded Afghanistan and established an empire including much of northern India. One of its capitals was the city of Kapisa (near Kabul). From the fifth to the seventh centuries A.D. control passed into the hands of the Sassanid dynasty which dominated Iran. 2.03 The next two centuries were notable for the successful attempts of Arab invaders to establish Islam. There was also a gradual movement of Turkic tribes into the area. In the middle of the tenth century A.D., Alptagin, a former Turkish slave, gained control of the principality of Ghazni in the south and founded the Ghaznevid dynasty, the first great Islamic empire in Afghanistan. It was in this period that the term Afghans came into use to describe the Pashtun tribes of the eastern mountains. At its peak under Mahmud of Ghazni, the empire reached to the Ganges. Ghazni became a renowned seat of learning with a lasting influence on Persian culture. In 1152, Ghazni fell to the rulers of neighboring Ghor in the southwest. The Ghorid dynasty stretched its control to northern India and established its base in Delhi. 2.04 In 1220 the Mongols under Genghis Khan invaded Afghanistan, destroy- ing the cities and fortresses in their path. Balkh was burned to the ground and its inhabitants massacred, and many other cities suffered a similar fate. In the middle of the fourteenth century, Timur (Tamerlane) the son of a Turkish tribal chieftain, claiming descent from Genghis Khan created an empire 1/ This section is based on two major sources: (1) Louis Dupree; Afghanistan, Princeton: Princeton University Press, 1973 (2) Harvey Smith, et al: Area Handbook for Afghanistan, Washington, D.C 1973. - 19 - which again reached into India. During the preceding period the Pashtun tribes had established themselves in the mountainous areas of the Sulaiman range. Since they controlled the passes which provided access to the Indian sub-continent, there was constant conflict between the Pashtuns and the Central Asian invaders. 2.05 In 1504, Babur, a descendant of Timur, laid claim to the empire. In the battle of Panipat near Delhi in 1526, he broke the power of the Afghan- descended Lodi dynasty and established the rule of the Moghuls. Babur loved Kabul and wrote tenderly of its beauty. Although he died in India, he was buried in Kabul as he had requested. For the two centuries following Babur's death, Afghanistan was fought over by the Safavids in Iran and the Moghuls in India. The Pashtun tribes, the Abdalis and Ghilzais were increasing in numbers and influence during this period. The Moghul rulers maintained con- trol by using what was to become a favorite tactic, playing off the tribes against each other. The Ghilzais dominated the area round Kandahar while the Abdalis ruled in Herat and the interior. Nadir Shah the ruler of Iran, used Abdali troops to break the power of the Ghilzai, and on his raids into India. 2.06 In 1747, with the assassination of Nadir Shah by officers of his troops in Iran, Ahmad Khan Sadozai of the Abdali tribe, who had risen to a high position in Nadir Shah's army, marched to Kandahar with a contingent of troops. He made Kandahar his capital and took the title Dur-i-Duran (Pearl of Pearls); since then the Abdali have been called Durani and the ruler took the name of Ahmed Shah Durani. The Pashtuns remained a group of scattered tribes, united mainly by language. Nevertheless the ascendancy of the Durani Pashtuns was a prime factor in the evolution of a national state. 2.07 The beginning of the 19th century saw the first interest of European powers in Afghanistan. The East India Company concluded the Anglo-Afghan Treaty with the Amir in 1809. At the same time the Russians were keenly' interested in the area. The Afghan rulers, learning perhaps from their own past, began a strategy which has been maintained almost to the present day, of exploiting the rivalries of the major powers with interests in the region, to their own advantage. Dost Mohammad who had ascended the throne in Kabul in 1826, first asked the Russians for support to regain Peshawar from its Sikh rulers, and then turned to the British to help defend Herat against the Shah of Iran. The British, distrustful of the Afghan ruler and the Russian intentions, launched the First Anglo-Afghan War (1838-42). The British in- stalled a new ruler, but tribal hatred of the British occupation led to a rebellion and the almost complete massacre of the British expeditionary force in 1842. 2.08 Dost Mohammad was restored to the throne in 1842. He was gradually able to regain some of the lands which had been lost in the preceding period. At the end of the Crimean War (1855), Britain and Russia signed a treaty which recognized the independence of both Iran and Afghanistan. This was a period of intense diplomatic activity and delicate manoeuvring between Britain and Russia. The rivaly between the two powers was probably instrumental in keeping - 20 - Afghanistan independent. It was extremely difficult for the Afghan rulers to maintain the necessary balance in their relationships however, and whenever a significant 'tilt' developed, trouble ensued. A wave of interventionist sen- timent in Britain led to Sher Ali (1863-79) seeking assistance from Russia. The result was a new British occupation following the second Anglo-Afghan War (1878-9). The British elected to withdraw in 1879, but forced Afghanistan to sign the Treaty of Gandamak in that year, which declared that the new Amir was bound to follow British advice in all his relations with other powers. In effect Afghanistan became a British protectorate serving as a buffer between Russia and India. 2.09 The inevitable response came in 1885 when the Russians invaded Afghan territory within a hundred miles of Herat. War was close but a compromise was reached on the boundary and by treaties of 1887 and 1895, the northern boundary was defined and has been maintained to the present day. In 1893 Sir Mortimer Durand pressured the Amir Abdur Rahman (1880-1901) to sign an agreement fixing the border of Afghanistan along a 1,200 mile line which cut the traditional tribal lands of the Pashtuns in half. The Durand line remains to this day an important issue in the relationship between Afghanistan and Pakistan. 2.10 The roots of modern Afghanistan lie in the reign of Abdur Rahman. He set about reducing the independent power of the tribal chiefs and religious leaders, by transferring most of their military and administrative functions to the central government. He developed a standing army and policy and issued a large number of new laws. His son, Habibullah who succeeded him in 1901 continued his policies. Habibullah introduced European medicine, surgery, automobiles, telephones and telegraph and even opened a school organized on European lines. There was increasing nationalism and anti-British sentiment during this period, as Britain still dominated Afghanistan's external rela- tions. The intellectual community pressed for closer relations with the Ottoman sultan in Turkey. During the 1st World War, Habibullah took the un- popular position of neutrality rather than aligning himself against the British. There was deep popular resentment and Habibullah was assassinated in 1919. 2.11 He was succeeded by one of his younger sons, Amanullah (1919-29). Amanullah was nationalistic and anti-British. Above all however, he dreamed of emulating Ataturk, and he was passionately interested in social and eco- nomic reform. In May 1919, Amanullah attacked the British forces in the third Anglo-Afghan War. Although he was not victorious, the war-weary British decided to give the Afghans freedom of action in foreign relations and recog- nized their complete independence for the first time through the Treaty of Rawalpindi in August 1919. Amanullah took a trip through Europe, Turkey and Iran in 1928 and returned convinced of the need for sweeping reforms. On his return he outlawed the veil and polygamy and decreed compulsory education for both sexes. He established the first parliament and ordered all Afghans to wear European dress in Kabul. These measures called forth a violent reaction. An illiterate Tajik bandit Bacha-i-Saqqo led an army to Kabul and forced Amanullah to flee to Kandahar, from where he later abdicated and went into exile in 1929. - 21 - 2.12 For a few months all was chaos. Nadir Khan, a general of the army, who was living in exile in France and was a descendant of Dost Mohammad, returned to Kabul and was able to unite the Pashtun tribes and establish himself on the throne. He set about reversing many of Amanullah's sweeping changes. He restored the process of consultation with tribal chiefs and proclaimed the supremacy of the Hanafi School of Islamic Law. He repealed many of the laws and constitutional reforms of his predecessor. However, he did try to extend some of the more positive features of Amanullah's reforms. He planned new hospitals and clinics and brought in foreign advisers. Nadir Shah's reign proved to be short and he was assassinated in 1933, to be suc- ceeded by his 19-year old son, Mohammad Zahir Shah, who was to occupy the throne for 40 years. 2.13 The second World War (Afghanistan was again neutral) and the parti- tion of India brought the issue of the Durand line to the forefront. The 'Frontier Ghandi', Khan Abdul Gaffar Khan had campaigned for an independent Pashtunistan which was gradually interpreted not as simply the unification of the Pashtun tribal lands, but the incorporation of those lands east and south of the Durand line into Afghanistan. After the War, economic development was also pursued somewhat more vigorously and in 1953 Mohammad Daoud, a cousin of the Shah became Prime Minister. Much of the impetus for economic development through large foreign-aided projects (the second phase of the Helmand valley development, the Nangarhar project, Kandahar airport, the highways and the Salang Pass) were initiated under Prime Minister Daoud's stewardship which lasted till 1963. 2.14 Afghanistan received relatively large amounts of foreign assistance during the 60s and there can be little doubt that this was in part motivated by the cold war rivalries between the USA and the USSR, the two major donors. The rivalry extended even to technical assistance and for much of the period both countries had teams in the Planning Ministry. Inevitably in these circumstances, the selection of projects often bore little relation to their economic viability. A World Bank mission which visited Afghanistan in 1971 observed that "aid donors have not been as helpful as they might have been in assisting a weak and inexperienced administration to become strong enough to take an effective part in development. Some projects have been dictated as much by strategic or ideological considerations as economic ones, and most projects have needed heavy ongoing commitments of finance and manpower both for capital and current expenditures to realize even their modest returns. Donors have insisted on pursuing these expenditures to the exclusion of other necessary activities." 1/ 2.15 The late 60s and early iOs were years of increasing frustration and disillusionment as the forward momentum of the large infrastructure projects was not maintained and the expected benefits failed to materialize. Many of the more highly educated Afghans left the country, and the Government seemed impotent to make the changes and reforms which were generally agreed to be essential. The constitution of 1964 had passed a good deal of power to 1/ Report NO. SA-29a: Current Economic Position and Prospects of Afghanistan. Feb. 1, 1972, Volume I, p.i. - 22 - the ministers and parliament. The parliament, however, appeared to follow the time honored Afghan tradition of decision by consensus. As a result every parliamentarian said his piece on every issue which arose. The main product of the parliament was endless speeches and almost no decisions. The King could have intervened legally but seemed reluctant to do so. Even such a relatively non-controversial issue as the bill to establish an Industrial Development Bank took five years of procrastination and debate before it was approved. In 1969/70 for example, the only bill passed by the parliament was the acceptance of an interest free loan. 2.16 Among the provisions of the 1964 constitution was one which barred relatives of the King from involvement in politics. This effectively limited the role which the former Prime Minister Daoud could play in the country's political life. Dissatisfaction continued in the early 70s, fanned by the droughts of 1970/71 and 1971/72 and the rising food prices which resulted. On July 17, 1973, while the King was visiting Italy, Daoud, supported by a group of army officers seized power and declared Afghanistan a Republic with himself as President. In an address to the nation in August 1973, the President com- mitted himself to the economic development of Afghanistan and to basic social and economic reforms. Inevitably the initial period was concentrated on the achievement of political stability. There were three attempted coups, and as in many other developing countries, the achievement of political stability has been associated with strict control of the press and the suppression of public dissent. By early 1977 however, the regime appeared to be firmly entrenched and a new constitution was introduced which allowed for the creation once again of a parliament. 2.17 President Daoud has taken a number of important initiatives. There has recently been a rapprochement with Pakistan which offers a great deal of promise for strengthening economic links with the sub-continent. Despite occasional strains, Afghanistan has maintained good relationships with its other neighbors, Iran and the USSR and has received substantial aid commitments from those countries. Happily both the Government and donors seem to have realized that the way aid was approached in the 60s was counter-productive. All in all there is some ground for optimism that the political basis for sound economic development will be laid, both domestically and on the interna- tional scene. B. Economic and Social Development 2.18 A visitor to Afghanistan in 1930 would have found an extremely con- servative Islamic society, almost entirely rural except for a few small market towns. The largest of these, Kabul, had no paved roads and few modern build- ings. It is indeed hard to characterize Afghanistan as an economic unit at that point in time. The journeys from Kabul to Herat and Mazar-i-Sharif took three to four days during the few months of the year that the roads were pas- sable. The main trade was between the nomadic tribes and settled agricultura- lists; the nomads provided meat, dairy products and farm labor, in exchange for grain, fruit and vegetables. The main items of rural consumption which could not be procured locally - tea, sugar, salt and cloth - were bought - 23 - either from the nomads or in the small stores of the market towns. In ex- change farmers sold produce or handicrafts such as carpets or sheepskin coats, which had already found a market in Europe and India. There were no banks in the country, money was little used and indeed the rupee was the currency until replaced by the afghani by Amanullah in 1925. A handful of small-scale in- dustries comprised the 'modern' sector. 2.19 To modernize the economy, Nadir Shah turned to two prominent Afghan traders. The first was Abdul Aziz Londoni who had almost singlehandedly developed the export of karakul, and the second, his partner Abdul Majid Zabuli who was primarily exporting wool to Russia. Zabuli founded the first bnnk, later known as the Bank-i-Melli in 1934. The bank was important not only for the investments it made, but also because of the system under which it was established, which became a prototype for much subsequent development. The Government granted the enterprise a monopoly (called a sherkat) and also took a minority stockholding position in the enterprise. The controlling interest was held by the private sector, many of whom were members of the royal family. On Zabuli's urging, the Bank-i-Melli invested in cotton gin- ning in the northern swamplands of Kunduz. The settlement of the Kunduz plain, the draining of the malarial swamps and the establishment of the Kunduz cotton company can justifiably be called Afghanistan's first major development project. 2.20 After Nadir Shah's violent death in 1933 the new King's uncles, who were the effective rulers for the next twenty years, continued the efforts at modernization. Most importantly there was a notable opening up to outside influence. It was felt better to stay clear of the Russians and the British (writers of the time characterized Afghanistan as a goat between those two lions), and instead the Government turned to Germany, Italy and Japan. The Germans became the most influential group and carried out some important research. Companies from all three countries set up offices in Kabul and a fairly regular weekly air service between Berlin and Kabul was established in 1937. The second World War brought a halt to economic progress though it did provide good markets for whatever Afghanistan could sell, so that by 1945 considerable foreign exchange reserves had been accumulated. 2.21 The progress from 1930 to the war's end had been mainly in the es- tablishment of a small, but powerful private sector and in the creation of a limited number of supporting institutions. A central bank, the Da Afghanistan Bank had been added to these in 1938. Trade had expanded and, perhaps most significantly, the high schools, which had been opened in Amanullah's time and were often staffed by foreigners, had begun to turn out a group of students who were subsequently able to take the lead in administration. A faculty of medicine had been founded in 1932, but Kabul University was only established in 1946. In relation to the country as a whole, however, the advances were modest indeed. The seeds of change, which Amanullah had planted without adequately preparing the ground, had not yet taken root. The countryside remained untouched by schools other than those of the mullah, health care except for traditional medicines, transport facilities, electricity, clean water and sewerage facilities. - 24 - 2.22 The end of the war found the Afghan Government flush with foreign exchange and ready to take up the project that had long been a dream - to irri- gate the southwestern desert through the waters of the Helmand river. The Helmand Valley Project began (there were however some earlier projects in the valley with German and Japanese assistance) as a direct association between the Government and the American firm of Morrison-Knudsen(M-K). The Helmand Valley Project was the beginning of a saga which continues to the present. "Human problems at all levels, from peasant resistance to bureaucratic folderol, beset the Helmand Valley project from its conception. Neither the Afghan Government nor the American engineering company understood the monumental problems of enfolding an entire region in the embrace of a single project. The Helmand watershed drains forty percent of Afghanistan's land area." 1/ The approach to irrigatibn development was back-to-front. First the dams were built then attention was given to the preparation of the land to be irrigated, then to testing the soils, and finally to teaching the settlers how to irrigate. 2.23 In 1945 costs had been estimated at $63.7 million, but they soon mushroomed far beyond that level. The foreign exchange surplus dwindled and the US Export-Import Bank was approached for a loan of $21 million for the project which was given in 1949. M-K actually completed the construction of the two dams and the Boghra canal system ahead of schedule, but in order to do so, short-cuts were taken and smaller projects and surveys were not under- taken. This was to plague the project later. In 1952, the Government created the Helmand Valley Authority (HVA) with its president given cabinet status. The main dam at Kajakai (300 feet high, 887 feet wide, 32 mile reservoir and 1,495,000 acre-feet capacity) was inaugurated in April 1953. This was only the beginning of the saga. In June 1953 Ex-imbank gave a further $18.5 million loan and an agreement was signed with an official US aid agency for the first time (TCA at that time). The money was for drains, power and land development in the valley. 2.24 By 1955 the Government had spent $70 million of Afghanistan's scarce reserves on the Helmand Project. Ten years later the return on the project were abysmal in terms of increased production, and it was being legitimately asked what had gone wrong? First was the failure to identify and implement drainage needs. There was serious waterlogging and salinity in many cases which reduced yields substantially below those of the initial years. In the worst case, waterlogging and salinity resulted in malaria and the departure of the settlers. The second major problem lay in the settlement part of the project. Newly irrigated land was given to nomads of different ethnic groups, without adequate preparation and buildup of supporting services. Thirdly, Afghanistan's civil service was not really prepared for a project of this complexity and magnitude. Maintenance was inadequate, and bureaucratic proce- dures resulted in endless wasting of time and money. The project was to prove a tremendous learning experience, but a rather costly one. "Too many decisions 1/ Dupree, op. cit. p. 483. - 25 - went unmade, too many farmers unsettled, so the desert did not bloom and the bread basket remained relatively empty." 1/ 2.25 In other respects however, the decade from 1953 to 1963 under Prime Minister Daoud, was the most dynamic that Afghanistan's economy had experienced. The centerpiece of the new approach to the economy was the shift from the old coalition of the private sector and the royal family through the mechanism of the sherkat, to a state planned and guided economic development. The period was also characterized by a shift towards the USSR and large amounts of aid from that source, beginning in 1954 with loans for the construction of silos in Kabul and Pul-i-Kumri and the paving of streets in Kabul. The Govern- ment's primary interest however, was in infrastructure. The difficulties with Pakistan over the Pashtunistan issue had re-awakened fears over the vulner- ability of Afghanistan's external trade access, and the main feature of the agreement with the USSR for $134 million of assistance signed in 1956, was the construction of a highway from Kabul to Sherkhan Bandar on the Amu Darya River, including the three kilometer long Salang Tunnel. 2.26 In March 1956 the First Five-Year Plan was launched, based largely on recommendations of Soviet advisers. The Soviet involvement in planning and aid touched off a lengthy period of competing assistance from the US which responded with $92 million of aid. This had an unfortunate beginning with the provision of $15 million for the construction of the Kandahar International Airport which has achieved notoriety as one of the classic 'white elephants' of international assistance. The US effort was concentrated in road links with Pakistan and in the Helmand. The first Plan allocated over 30 percent to agriculture and irrigation, with 25 percent in transport and communications. In practice, however, expenditure on the Plan did not accord with the alloca- tions and transport investment, which was carried out essentially in turnkey fashion and was therefore less dependent on domestic project implementation capacity, accounted for 50 percent, while only 13 percent was spent on agri- culture despite the Helmand. It is perhaps a recurring theme in Afghan plan- ning, but was particularly marked at the outset, that the Plan was governed mainly by the type of assistance foreign nations were willing to provide. There was no attempt to integrate or coordinate projects and sectors. 2.27 Prime Minister Daoud resigned in 1963 to promote the liberalization of the political system. This also permitted an improvement in relations with Pakistan as he had become identified with confrontation over the Pashtunistan issue. By then the foundation existed for sweeping changes in Afghanistan's 1/ Dupree, op. cit., p. 507. 1977 takes a somewhat kinder view of the Helmand than the late sixties, however. Not only has production in- creased significantly, but many of Afghanistan's better agricultural personnel received invaluable training and experience on the project. It is arguable that no matter where it was located, or how well it was planned, Afghanistan's first major irrigation project was bound to be a "Helmand". See also para. 4.21. - 26 - economy; paved roads, increased power supply, new state-run and owned companies producing metal products, textiles and cement, etc. But perhaps even more importantly by 1963 the concept - a revolutionary one in Afghanistan - that the Government was responsible for the economic development of the country, was broadly accepted, at least among the educated and in the urban areas. In the rural areas the idea of change was still remote, but even there the roads were causing changes in attitudes and life-styles. 2.28 The Second Plan (1962-67) envisaged a fourfold increase in expendi- tures over the first and even though this proved unattainable, total Plan expenditure was still more than double the previous Plan. The emphasis on infrastructure projects particularly in the highway sector was continued, since there were a large number of ongoing projects. By the end of the Plan Afghanistan had 1,200 miles of paved roads which linked all the major regions of Afghanistan with Russian and Pakistani railheads. Most major towns were within a day's travel of the capital. Power output during the period had expanded at the rate of 25 percent a year due to the completion of a number of hydro-electric projects near Kabul by the USSR and Germany. The total number of schoolgoers rose in the two Plans from 126,000 to 540,000, and by the end of the Second Plan there were 5,000 students at Kabul University. 2.29 The vast expansion in infrastructure facilities and trained manpower did not however reflect itself fully in increased production and income, al- though the new industrial units constructed during the two Plans did of course result in new output. Soviet technicians discovered deposits of natural gas, and production began in 1967. Coal production increased from 17,000 tons in 1954 to 147,000 tons in 1966. Cement production commenced in 1958 and reached 158,000 tons by 1966. There were, however, a total of only 20,000 employees in the 59 industrial establishments with more than 20 people in Afghanistan in 1966. Over 12,000 of these were in textiles. All in all this represented a rather modest role for the 'modern' sector, probably less than 0.5 percent of the labor force and less than 3 percent of NDP. 2.30 The data on agricultural production are not sufficiently reliable to interpret what was happening during the period. But given the sluggish progress of the major irrigation projects, particularly the Helmand and the Russian aided Nangarhar project, and the limited use of modern inputs, there is no reason to believe that it had grown any faster than population. The most notable increase was in fruit production. This was based largely on the expansion of acreage under fruits due to favorable prices. Some of this expansion was at the expense of wheat, but the total amount of land under orchards was still only 2 percent of total cultivated land by 1967. The failure to expand cotton and sugar production was particularly disappointing and appears to have resulted in large part from the unfavorable prices offered to producers. 2.31 During the period of the first two Plans, Afghanistan, unlike many other developing countries, was not constrained by a shortage of financial resources. For example the World Bank, despite considerable availability of funds and staff input was able to finance but a single project by 1967 - a loan for education of $3.5 million which was never disbursed, and was later - 27 - cancelled at the Government's request. The constraints lay in the identifica- tion and preparation of projects, the ability to take timely decisions and the capacity to implement without unreasonable amounts of foreign technical assis- tance. Over the two decades 1950-1970, aid to Afghanistan averaged about $65 million a year, much of it in the form of commodity assistance. About 50 per- cent came from the USSR and 30 percent from the USA. The level of aid per capita of about $5 per annum was near the average of all developing countries during this period. 2.32 The Third Five-Year Plan (1967-71) proposed to reduce the emphasis on infrastructure projects in favor of smaller, quicker yielding projects in agriculture and industry. In the circumstances these good intentions were not realized. Delays in the ongoing large projects made the redirection of re- sources almost impossible both because they pre-empted scarce local manpower and because foreign donors were loath to begin new projects while difficulties persisted with existing ones. Well over half of the eventual Plan expenditure was devoted to carryover projects. The implementation of the Plan was also severely affected by the droughts of 1970 and 1971 which caused a decline in wheat production by an estimated 20 percent below normal with similar declines in other crops. Livestock production also contracted. The numbers of sheep fell by more than 40 percent. The Government moved with surprising effective- ness to distribute imported foodgrains and widespread starvation was averted. Even so the nomads and some of the more isolated villages suffered severely from lack of food. Triggered by the droughts, the early 70s were character- ized by increasing restlessness with the lackluster economic performance and the ineffectual quality of the leadership. There was little sense of forward momentum as had been the case ten years earlier. A fourth Plan covering the period 1972-77 was drawn up, but not implemented due to the change in Govern- ment in 1973. 2.33 The World Bank report of 1972 1/ summed up the situation as follows: "The past fifteen years have been frustrating and disappointing for those con- cerned with development in Afghanistan. A relatively large volume of aid sus- tained high levels of investment to little visible purpose in terms of higher standards of living for the vast majority of the population. To some extent it was inevitable that the major share of this investment would be neede'd for basic economic and social infrastructure, with long gestation periods. How- ever it has proved difficult to move from this stage to a point where effective use can be made of the infrastructure created, and a proper impetus can be pro- vided to the kind of productive activities which result in widespread increases in income." 2.34 The report continues "The responsibility for this situation lies primarily with the inadequacies of the administrative structure. This is re- flected in the failure of the government to manage the large number of public enterprises efficiently, to allocate funds within projects so as to secure the maximum return, to gear up its administrative capacity to prepare new 1/ SA-29a, op. cit., p. 1. - 28 - projects, to implement projects efficiently through the operating ministries, and to promote the institutional and legislative changes needed to create an appropriate environment for private agricultural and industrial development." Nor did foreign donors escape these strictures. Their role had often adversely affected allocation and the development of domestic capacity. The report urged on the Government a period of consolidation "which would allow a reallocation of investments to emphasize the utilization of existing capacities rather than the creation of new ones." C. The Economy from 1973 to 1977 2.35 The coup of July 1973 is testimony to the failure of the period which preceded it. There was a general consensus that the development effort had slowed down. This was not only a matter of the disastrous droughts of 1970/71 and 1971/72 but, more seriously, the failure of the institutional base to evolve. Critical decisions were being held up by the tortuous procedures of the Jirgeh (the parliament), the administration was weak and dispirited. Donors were weary of sluggish project implementation and the failure to utilize the substantial infrastructure which had been created, so that aid inflows were considerably below their earlier levels. In the years following the coup, the consolidation suggested in the Bank's 1972 report has indeed begun: much of the effort has been directed at institution building leading to the preparation of the First Seven-Year Plan in 1976 and the issuance of a new constitution in 1977. 2.36 An important element in this consolidation phase was the series of good harvests and ample rainfall from 1972/73 to 1975/76. These encouraged the spread of inputs such as improved seeds and fertilizer, and enabled the flocks and herds, which had been decimated by the earlier droughts, to recover gradually. Among the most striking changes in the period was the diversifica- tion of agricultural output with the increasing production of cotton, sugar and other commercial crops on irrigated land. This was possible because good harvests of dry land wheat meant that Afghanistan was self-sufficient in the food staple, and kept its price at reasonable levels. The poor harvest of 1977 has somewhat reversed this trend, and sizeable imports of wheat (about 200,000 tons, equal to about 6.6 percent of total supply) are needed. Table 3 below gives an indication of the progress of agricultural production in the period. - 29 - Table 3: AGRICULTURAL PRODUCTION INDEX (1968/69 is equal to 100) Est. 1971/2 1972/3 1973/4 1974/5 1975/6 1976/7 Wheat 81 104 115 117 121 125 Corn 87 93 98 100 101 104 Rice 87 100 104 104 108 111 Barley 98 97 100 105 106 110 Cotton 89 82 152 204 225 224 Sugar Beets 97 102 103 108 162 147 Vegetables 111 101 104 107 110 140 Fruits 78 96 101 104 106 108 Source: Central Statistics Office. 2.37 On returning to power, President Daoud enunciated a policy emphasiz- ing the role of the state particularly in developing heavy industries based on minerals and other resources. To promote this policy, the banks were national- ized. As a consequence of nationalizing Bank-i-Melli the Government gained control of the sherkats, by far the most important private firms, which had been established through that organization. These statements and measures caused a crisis of confidence in the private sector. Private investment slowed to a trickle. Prior, to the coup, there had been considerable response to the Foreign and Domestic Private Investment Law, with its liberal incentives for private industry. After the coup most of the pending applications were with- drawn or if approved, were not implemented. 2.38 The Government took steps towards better utilization of the substan- tial capacity in the public sector - and with some success, as shown by the higher output after 1973 in Table 4 below. Table 4: INDUSTRIAL PRODUCTION INDEX (1968/69 is equal to 100), Est. 1971/2 1972/3 1973/4 1974/5 1975/6 1976/7 Coal 108 57 93 92 120 128 Natural Gas 150 171 165 174 178 157 Sugar 160 134 140 168 257 209 Vegetable Oil 129 126 184 274 342 326 Ginned Cotton 124 113 185 242 327 390 Cotton Textiles 126 125 126 140 124 151 Cement 81 100 149 167 163 138 Source: Central Statistics Office. - 30 - Even after these increases in production however, the share of modern industry in NDP remains little over 3 percent. Hence these figures are more important as indicators of the discipline which the government was able to instill into the enterprises than in terms of their economic impact. 2.39 A far more important economic indicator was exports and foreign exchange earnings during the period. During the drought years Afghanistan's exchange rate depreciated rapidly as imports were high, export availabilities were reduced and above all food moved, often illegally, across borders to meet the country's deficit. The situation was reversed with the good harvest in 1973 and the exchange rate appreciated from 91 Afghanis to the dollar in April 1971 to 70 to the dollar by April 1973. The measures taken by the government included tighter control of imports and higher production in export indus- tries. This was given a boost by the acceleration in the prices of many of Afghanistan's exports in the period from 1972 on. The result was that the exchange rate continued to appreciate reaching Af 60 to the dollar in April 1974, Af 55 to the dollar in April 1975 and Af 42 to the dollar in October 1976. This appreciation threatened to make many of the traditional exports unprofitable, and the government intervened to bring the rate up slightly to 47.5 afghanis to the dollar by April 1977. 1/ In the meantime the level of reserves rose from $56 million in March 1973 to $215 million by March 1977. 2.40 There are many reasons for this trend. First, although the evidence suggests only a modest improvement in the country's terms of trade, much of the increase in incomes from exports went into the hands of agriculturalists such as cotton and raisin growers. These groups have relatively low consump- tion elasticities, and extremely low import consumption elasticities, with the result that demand for imports did not rise proportionately either from the direct or indirect impact of export earnings. Secondly, there were earnings from remittances from Iran by a large groups of Afghan workers who migrated there after the oil price increase. Estimates of the size of this group range from 100,000 to 300,000. Thirdly, according to narcotics control agencies, following the reduction in the supply of Vietnamese narcotics on the world market after 1973, it has been suggested that there has been an increase in supplies from Pakistan and Afghanistan. This claim is however disputed by the Government. Fourthly, during the period of increasing instability in Pakistan, Afghanistan may have been the route for a good deal of capital flight from that country. These factors, plus the good harvests and sizeable offers of foreign aid from Iran and other OPEC countries after 1973, have contributed to the strength of Afghanistan's external position. Many of these factors are volatile however, and substantial fluctuations in exchange earnings and therefore exchange rates are possible in the medium-term. 2.41 There was also some improvement on the domestic resource front. The Government embarked on a vigorous program of tax collection, and revenues increased at the extraordinary rate of 18 percent a year in real terms from 1/ Upward pressure subsequently resumed however and by end December 1977 the rate had returned to Af 43 to the dollar. - 31 - 1973 to 1977. As a result the Government repaid much of its earlier borrow- ings from the banking system. It has been argued, however, that the tax collection was indeed too vigorous and frequently relied on arbitrary assess- ments by individual officials, a factor further contributing to the general disillusionment of the private sector. In 1976 the Government introduced a graduated land tax to remedy the relative under-taxation of the agricultural sector (i.e. through direct taxation, but ignoring the para-tax effect of controlled agricultural prices). The graduated land tax is linked to the land reform which the Government is attempting to introduce, in that payment of the tax is necessary to establish the legal ownership of the land. Collec- tions thus far have fallen considerably short of the amounts budgeted. 2.42 The factors mentioned above have resulted in relatively modest price increases (averaging about 6 percent per annum from 1973 to 1977). This has occurred despite a doubling of the money supply over the same period. Part of the reason for this would seem to be that growth and monetization absorbed much of the annual increase in the money supply. In addition, it would appear that much of the increase in income went into the hands of agriculturalists and has been hoarded. There is little awareness in rural Afghanistan of the concept of inflation and the eroding purchasing power of money. On the other hand a great deal of weight is attached to liquidity. Despite positive rates of interest, bank deposits are almost unheard of outside the urban areas. Finally the rapid appreciation in the foreign value of the afghani may have resulted in substantial speculative demand for the currency both at home and abroad. 2.43 'Consolidation' is as good a word as any to describe the period from 1973 to 1977. Income rose rapidly from the depressed base of 1971 and 1972, but when measured over a longer period, using a base of 1968/69 for example, it probably did no more than keep pace with the rate of increase in population. The real achievements of the period are perhaps more in the return of stability by 1977, and the steady growth of a number of key institu- tions, particularly those serving the agriculture sector. It is against this background that the First Seven-Year Plan has been prepared. D. The First Seven-Year Plan 2.44 Planning in Afghanistan is an unenviable task. The data base is at best weak and at worst nonexistent. There is no broad consensus on develop- ment objectives to guide the planners. There is a shortage of technical man- power to identify and prepare projects. In these circumstances the "First Seven-Year Economic and Social Development Plan 1355-1361 (March 76-March 83)" is a bold and often impressive attempt to understand Afghanistan's problems and to evolve a strategy for dealing with them. There is much to criticize about the Plan, but it has the overriding virtue of providing a focal point for thought and debate about the direction which development should take. 2.45 As discussed in Section C above, there is a considerable history of planning in Afghanistan. The four Five-Year Plans beginning in 1956/57 were predominantly the work of foreign advisers and reflected a development effort which consisted largely of projects selected, prepared, implemented and financed - 32 - by foreign donors. These projects were frequently poorly formulated; in part because of the foreign advisers' ignorance of the Afghan environment. In some ways the present Seven-Year Plan still reflects many of these earlier weak- nesses. The Plan presents a large number of projects. Many of these have been subject to only the most cursory technical and economic analysis. In addition, many of the project schedules are unrealistic in their assumptions concerning the implementation capacity of the operating ministries. 2.46 Granting these criticisms, however, the Plan is a definite step for- ward. There was greater local input than ever before. An attempt was made to involve the operating ministries in preparation of the sectoral plans and there was an effort to coordinate the preparation through working groups composed of interested.ministries. The objectives of the Plan are very ambitious, but not perhaps unreasonable as targets. An exception to this is the scale of the investment program, but even here there is a recognition by the officials in charge of planning that a more appropriate estimate of likely achievement would be about 60 percent of the target. While such a large program is understand- able as an attempt to meet donor preferences and to accommodate special interest groups within the country, it compromises one of the major objectives of the Plan - to embody national development priorities. The annual planning process will need to focus on developing a leaner investment program which allows scarce manpower to be concentrated in the areas offering the highest economic return. 2.47 In a chapter entitled "General Policy Framework of the Plan" (p. 21) a statement is provided of the priorities of the political leadership. There are 18 separate points and the first begins with the declaration that "The Republican State of Afghanistan attaches great importance to the creation of heavy industries such as mineral extraction, machinery manufacturing units, chemical and power industries etc., which are basically necessary for rapid economic growth and for the maintenance of an independent economy." The first reference to the rural sector is contained in point 7 which relates to land reform. Table 5 below gives an indication of the implicit Plan priorities. Table 5: SECTORAL SHARE IN PLAN OUTPUT AND INVESTMENT (in percentages) Growth of Share of total value-added investment in annually 7 year period Total GDP 6.2 100 Industries, Mines and Energy 9.4 37 Agriculture, Animal Husbandry and I Irrigation 4.6 25 Transport and Communication) 32 ) 7.2 Social Services ) 6 - 33 - 2.48 Perhaps the most striking feature of Table 5 lies in the very large allocation for transport (32 percent). This compares with a 15 percent allo- cation of total investment in the seven years preceding the Plan, and recalls the late 50s and early 60s when the construction of the highway to the north from Kabul, over the Salang Pass, dominated the total Plan expenditure. This large allocation is due to the proposed construction of a railway line from Islam Qala on the Iranian border to Kabul, with a branch line to the Hajigak iron ore deposits. $890 million are proposed for the present Plan period, financed largely by aid from Iran, with a total cost of $1.2 billion. (All figures for the Plan period are in 1975/76 prices.) The railway alone constitutes no less than 23 percent of total Plan expenditure - virtually equal to the entire proposed expenditure on agriculture, animal husbandry and irrigation. The next largest project in the Plan is the $120 million to be spent during the Plan period for the initial stage of the copper smelter at Ainak to be built and financed by the USSR. 2.49 Preliminary feasibility studies have been carried out on the develop- ment of a railway on a basis which excludes from the evaluation its role in providing an outlet for a proposed $800 million project to exploit the iron ore deposits at Hajigak. Only a small portion of the expenditure on this project is included in the current Plan. Nevertheless, the railway should be looked at against the background of the overall strategy of developing heavy industry. There is an important school of thought in Afghanistan which has, for many years, viewed Hajigak iron ore as being central to Afghanistan's future development. It derives its source from the views of development which prevailed in many countries fifteen or twenty years ago, which tended to equate development with heavy industry in general and the steel industry in particular. Preliminary studies have indicated that the exploitation of Hajigak would only be feasible on a massive scale, primarily for export. The construction of a rail-link would be a necessary condition for the feasibility of the proposed steel project, although it would also provide an outlet for the products of other heavy industries, such as copper, coal and cement. The overall approach has obvious links to the Soviet model of development. 2.50 The experience of the past 15 years suggests that heavy industry is neither a necessary nor a sufficient condition for the economic progress of countries at Afghanistan's stage of development. In fact, various technical studies suggest that Afghanistan's comparative advantage lies more in the pro- cessing of agricultural surpluses both for the domestic market and for exports, than in heavy industry. This does not, of course, preclude the possibility that particular projects in areas such as cement production and coal mining may have high economic returns and should be accorded priority in the Plan period. 2.51 The specific programs and their financing are discussed in subsequent sections of the report. In the past, Afghanistan's Plan has been regarded as a document delineating a broad range of possibilities rather than a rigid investment program. It is in this spirit that the report has approached the Plan. The sectoral chapters represent an attempt to define those elements in the program which most closely conform to the country's needs and opportuni- ties, within the constraints set by the availability of manpower and financial resources during the seven-year period. - 34 - E. The Development Perspective 2.52 From a writer's point of view, the present is always the crossroads of a country's development. There are objective reasons for arguing that in 1977 Afghanistan is indeed at the crossroads with respect to making fundamental choices about the nature of its economy and its society. A new Constitution has been promulgated and a new economic Plan has been prepared. These two key documents can be broadly perceived as a commitment to modernization. The nature and pace of that modernization will depend on the will and the capacity to implement the Constitution and the Plan. 2.53 Much of this report aims at developing a scenario for the moderniza- tion of the Afghan economy. We do not claim that there is only one way to achieve this or that the Bank has a monopoly on understanding the Afghan eco- nomy. The scenario is put forward as a viable approach to achieving relatively rapid modernization, with a wide distribution of the benefits in a manner which is consistent with Afghanistan's unique traditional society, and which is real- izable within the constraints imposed by its inexperienced administration. The key to the strategy is the development of an increasing agricultural and livestock surplus which can be processed in part for the domestic market, but even more importantly to supply growing markets in nearby countries. This would be supported by a limited number of well managed public sector indus- tries using some of Afghanistan's industrial raw materials. The strategy would imply a considerable decentralization of administration, institutions and investment in physical and human infrastructure since growth would be regionally spread rather than concentrated in the Kabul area. It would be supported by programs aimed directly at meeting the basic needs of the population. The specific policy measures and investment programs which are needed to implement this strategy will be clarified in subsequent sections of this report. - 35 - III. THE ROUTE AHEAD: POPULATION AND INCOME 3.01 The delineation of a development strategy for Afghanistan must begin with a definition of the present standard of living. The figure for GNP per capita is a useful yardstick of progress over time and provides some basis for international comparisons. It must be supplemented however, by an understand- ing of patterns of income distribution within the country and a knowledge of the extent to which income has been translated into the provision of basic goods and services to the population. Afghanistan must evolve a development strategy which is geared not only to higher growth of per capita GNP, but to insuring that income is fairly distributed and that the primary living needs of the vast majority of the population are met. A. The Demographic Perspective 3.02 The principal objective of the Seven-Year Plan is "to accelerate economic growth to raise the standard of living of the people." To begin the analysis, let us use GNP per capita as a simple measuring rod for the standard of living. It follows that raising living standards entails increasing the rate of growth of aggregate income and/or lowering the rate of growth of the population. Within the time horizon of the Seven-Year Plan though, the rate of growth of population is unlikely to change much, so maximizing the growth of per capita income boils down to maximizing the growth of output. In the longer run, however, the optimal strategy in a relatively labor abundant, capital scarce country like Afghanistan probably calls for both raising the growth rate of GNP and reducing the growth of population. This is not however to imply independence of means; the maximization of economic growth calls for restrained population growth to allow sufficient investment in directly pro- ductive activities, and rapid per capita income growth is in itself a force that can act to slow down population growth. 3.03 The dynamics of population growth are slow yet powerful. There is little that can be done to counter its effects in the current generation, yet it is in this generation that the patterns of population growth in future generations are determined. Here lies the danger, for in a world of sequen- tial fixed term plans with set targets, it is all too easy for population policy to be neglected or assumed away, only to have the problem keep re- emerging in ever more serious degree. But each time it is once again too late significantly to affect growth for another generation. It is imperative that population policy look beyond the traditional five to seven year planning period. Failure to do so under any circumstances is an enormous mistake, but in countries where fertility is high, infant mortality high but on the decline, and the population structure extremely young it could negate much of the development effort. Afghanistan is one such country. (i) Demographic Characteristics 3.04 The demography of Afghanistan is largely unknown. There has never been a national census, and the little census and survey work that has been done is either incomplete, location specific or demonstrably inaccurate. - 36 - Furthermore, all survey work is plagued by problems of underreporting and inaccurate reporting common to all cultures with little concept of chrono- logical age, and social and cultural reluctance to recall infant deaths. Consequently population estimates in the past have been crude, and ranged as high as 19 million and as low as 12 million. 1/ Only one comprehensive, scientific survey - Afghan Demographic Studies (ADS) - has ever been con- ducted, and only for the settled population. It was undertaken by the Central Statistics Office (CSO) with USAID technical assistance in 1972/73. 2/ Some of this work was subsequently refined, to compensate for undercounting and inconsistencies, by several groups including the International Statistical Programs Center (ISPC) of the United States Bureau of Census. 3/ Most of the demographic data used in this report is based on the original ADS Survey results, and whenever possible its refinements, including those of ISPC. The analysis in the succeeding paragraphs is based on models developed in the World Bank. It should be noted that one group, the nomads, who comprise about one tenth of the population, has not been the subject of any demographic work at all. 4/ Their number is still almost complete speculation, and most of their demographic characteristics are assumed from those of other groups. 1/ Official estimate (high) and ADS estimate (low), mid-1975. 2/ State University of New York (Buffalo), National Demographic and Family Guidance Survey of the Settled Population of Afghanistan, ADS Volumes 1-3, 1975. The ADS Survey has not been approved by the Government and has been the target of some criticism. This has centered on two points: (1) the treatment of collected data for under-counts and internal consis- tency, and (2) the method and theoretical basis of estimation for national level parameters. Regarding the first point, the original survey work has been refined (see above). However, the second set of criticisms has been less easy to deal with. They concern the procedure used in selecting sample villages, which was based on a 1967 agricultural census (the ADS Survey proved this to be extremely unreliable) and the procedures used in extrapolating from the populations of individual villages to provincial and national estimates. These procedures were based on male civil registration data, and in provinces where these records are not kept, photo house counts. Both are felt to be of reasonably high quality, but not so reliable as to permit accurate extrapolation of survey results. 3/ Spitler, James F. and Frank, Nancy B., Afghanistan: A Demographic Uncer- tainty, International Statistical Programs Center, US Bureau of Census, Washington, D.C. Paper prepared for presentation at Population Associa- tion of America, St. Louis, Missouri, April 21-23, 1977. 4/ Because their survey was over more than one year and nomads might there- fore be counted in different places, ADS chose to omit them altogether than to try and determine double-counts. A full ADS Survey of the nomadic population was planned for later however, it never materialized. Only an extremely tentative nomadic population figure of 1.3 million was estimated for 1974/75. - 37- 3.05 In the view of the World Bank, the best and most recent estimates are beginning to point to a 1977 population of Afghanistan in the 13-15 million range, with the most likely single estimate about 14 million. Approximately 1.5 million are believed to be nomads, of the remaining settled population of 12.5 million, approximately 2 to 2.5 million are classified as urban (as defined by the Government to comprise the 87 municipalities), and the remain- ing 10 to 10.5 million rural. Thus about 85 percent of the total population can be classified as rural. Present population growth is moderate - ISPC estimates suggest growth in the 1.8 percent-2.5 percent range, with the most likely single estimate being about 2.2 percent. 3.06 The analysis of the World Bank suggests that the population of Afghanistan stands poised to grow at unprecedented rates. Three primary reasons can be identified: 1/ (a) The population has a youthful age structure - 16.5 percent are less than age five, and 43.2 percent less than age fifteen. (b) There is the potential for a rapid decline in mortality. Mortality is extremely high - the crude death rate is estimated at about 30.7 per thousand. Infant mortality is among the very highest in the world. ADS survey results adjusted to compensate for the under- reporting of deaths that is prevalent in all surveys of this type, indicate an infant mortality rate of 269.4 per thousand - more than one-fourth of all those born, die before age 1. Similarly, the age structure of mortality is overwhelmingly skewed towards the younger ages. This is shown in Table 6. Table 6: AGE STRUCTURE OF MORTALITY 1972-73 Age Group Percent of all Deaths 0 - 1 37.9 1 - 4 15.5 5 - 14 8.2 15+ 38.4 100.0 Source: ADS, op.cit., Vol. I, Table III.4, p. 48. As a consequence of consecutive childbirths, maternal mortality is also very high. Life expectancy at birth is extremely low, but while an important indicator for international comparisons of mortality levels in different countries, it does give a distorted picture of what age Afghans on average can expect to live given the extremely high infant and child mortality in Afghanistan. This is shown in Table 7. 1/ Unless explicitly stated otherwise, all statistics apply to settled population only. Net migration is assumed to be zero. - 38 - Table 7: LIFE EXPECTANCY BY AGE AND SEX - 1975 Males Females (a) at birth 34.0 36.0 (b) at age 1 46.7 46.9 (c) at age 5 49.5 49.9 Source: Spitler, N. and Frank, N. op.cit. Estimates employ "East" model Coale- Demeney life tables. (c) Fertility is extremely high - the crude birth rate is estimated at 51.4 per thousand. The total fertility rate (the average number of live births a woman has during her reproductive life) is about 7.7. The following table shows age-specific fertility rates (number of live births per thousand women per year). Table 8: AGE-SPECIFIC FERTILITY RATE 1972-73 (per 1,000 women) Age 15-19 20-24 25-29 30-34 35-39 40-44 45-49 Age Specific 136 313 343 291 236 143 80 Fertility Rate Source: Spitler, N. and Frank, N. op.cit. 3.07 The significance of the above demographic characteristics can be seen by a comparison with countries of similar geographic and social background. Table 9: BASIC DEMOGRAPHIC INDICATORS OF SELECTED COUNTRIES - 1973 Life Crude Crude Expectancy Rate of Birth Rate Death Rate at Birth Natural (per thousand) (per thousand) (both sexes) Increase Afghanistan 51.4 30.7 35.0 2.1% Sri Lanka 28.6 6.3 67.8 2.2% Pakistan 47.4 16.5 49.8 3.1% Morocco 46.2 15.7 51.4 3.1% Iran 44.8 13.7 53.5 3.1% Iraq 48.1 14.6 52.7 3.4% Tanzania 50.2 20.1 44.5 3.0% Source: UN Population Division: Selected World Demographic Indicators by Countries, 1950-2000. ESA/p/W p. 55, May 1975. - 39 - (ii) The Demographic Outlook 3.08 The low life expectancy and high death rate are not acceptable com- ponents of the living standards of any nation at this point in history. The highest priority attaches to programs which have an impact on these indicators. Yet a major reduction in mortality would be a hollow victory unless fertility declined simultaneously, for the consequence would be a sustained increase in the rate of population growth. The following scenarios illustrate the impact of varying degrees of success in improving health and reducing fertility over the next 50 years: Scenario I - Ineffective public health programs and no population program. Scenario II - Effective health programs, but an ineffective popula- tion program. Scenario III - Effective health programs and an effective population program. Table 10: POPULATION ESTIMATES 1975-2025 (Millions) /a Scenario I /b Scenario II /c Scenario III /d 1975 13.4 13.4 13.4 1980 14.9 15.0 14.9 1985 16.8 17.2 16.8 1990 19.1 20.0 19.0 1995 21.7 23.5 21.5 2000 24.6 27.6 24.2 2025 46.2 69.3 39.0 /a Nomadic population assumed to have same demographic character- istics as settled population. /b Average life expectancy at birth remains constant at 36.0. Total fertility remains constant at 7.745. /c Life expectancy at birth improves from 36.0 (1975) to 48.5 (2000) and to 60.2 (2025). Fertility remains constant. /d Life expectancy at birth improves as in c/ above. Total fertility declines from 7.745 (1975) to 5.295 (2000) and 2.844 (2025). Source: IBRD estimates based upon ISPC and ADS data. 3.09 Effective health programs will have enormous impact on the size of the population by the year 2025: the population will be 50 percent higher than it would have been in their absence. The implications of Scenario II would include the following: (a) If all children ages 7-14 were to be en- rolled in primary schools, the number of primary school enrollments would be 65 percent higher than it would be under Scenario I. (b) Assuming all children - 40 - of primary school age are enrolled, and secondary and university enrollment rates remain unchanged, the labor force of about 15 million under Scenario II would be 35 percent higher than it would be in the absence of effective health programs. (c) Under Scenario II average food yields will have to be 50 per- cent higher to maintain the same per capita availability as under Scenario I (Scenario I already implies a three-fold increase in average yields, based on present assumptions about the extent of future irrigation). Population pressure, particularly on the less productive land is likely to drive increas- ing numbers to the cities, where their health, education, water, housing and employment needs will have to be met. If this results in lower allocation of these services to rural areas, even greater numbers will migrate to the towns, perpetuating the process. 3.10 In general, faster population growth will drain scarce economic resources dway from directly productive investment into consumption and social services. This will lower the rate of overall economic growth, and in con- junction with the faster growing population, result in greatly reduced rates of growth in average per capita incomes. At the very very least, per capita incomes in 2025 will be 50 percent lower under Scenario II than they would under Scenario I. 3.11 Nevertheless, there is nothing quite as imperative to improving the quality of life in Afghanistan as effective health programs of the type embodied in Scenarios II and III. These objectives should be regarded as minimum acceptable standards, and efforts should be made to do better still. But at the same time every effort should be made to reduce the fertility rate. This is not only a matter of keeping the population within affordable bounds; successive births are one of the greatest detriments to the health of both mothers and children. Increasing the time between births would be conducive to better child care, and would allow the mothers to recover from the strains of pregnancy and childbirth. Mothers would have fewer babies, yet there would be only a small reduction in the number of children who survive beyond the age of five, with the result that both mothers and children would be healthier. 3.12 Scenario III above illustrates how significant the effects of a con- certed family planning effort introduced in conjunction with effective health programs could be; by 2025, it could not only have kept the population to 39 million, about 56 percent of what it would have been in the presence of suc- cessful health program alone, but it would also be about 16 percent lower than it could have been in the complete absence of effective health and family planning services. Lower population growth would also raise the standard of living. Per capita incomes would probably be about 75 percent higher, the rate of growth of per capita incomes would be almost three times as great as they would be if only mortality were lowered, and food requirements would be about 40 percent less. 3.13 The choice facing Afghanistan is whether its population fifty years from now will be 39 million or 69 million. Unfortunately this is not a choice which can be left to future generations since they will find that the outcome has already been determined for them. It is understandably hard for policy- makers to focus on issues which are as distant as these in deciding whether - 41 - to implement a population planning program, but in the context of Afghanistan, where there is a good deal of complacency about the population question, des- pite considerable pressure on available land, this perspective is important. And for a country like Afghanistan where so many factors conspire to blemish the quality of life, there is probably no more potent combination of policies which could be pursued to ameliorate the present and at the same time safe- guard the future. B. A Profile of Living Standards 3.14 In a poor country like Afghanistan, the standard of living depends on the extent to which the basic needs of subsistence are met - whether people have sufficient food, clean water, enough clothing, adequate shelter and fuel, the opportunity to receive health care, and a basic education. In Afghanistan these needs are not currently met for the majority of the population. (i) Nutrition 3.15 The evidence on the quality of nutrition in Afghanistan is somewhat confusing. The aggregate data suggest that there is enough food in most years, and Afghans on the whole appear healthy - one sees little obvious malnutrition and equally little obesity. Yet there is no doubt that poor nutritional prac- tices are a major contributor to health problems, particularly infant and child mortality. Figures for both population and aggregate food production of Afghanistan are unreliable, making an accurate assessment of per capita food consumption almost impossible. On the basis of the official cereal production estimates and a population of 14.0 million, overall food availabilities would appear to be adequate in good years. Assuming that all wheat and rice (except for spoilage and seed requirements of 10 percent), as well as half the maize and one fourth the barley, is for human consumption, the aggregate per capita cereal consumption is approximately 240 kg annually. The calorie equivalent of this intake is approximately 2,250, about 7.5 percent below the FAO esti- mated daily requirement of 2,440 calories. However, even the poorest families consume some sugar and seasonal fruits and vegetables. Similarly, the rela- tively high protein content of the cereals consumed, and the annual average 11.5 kg of meat and 60 kg of milk equivalent consumed per capita put Afghanistan well ahead of the minimum protein requirements (about 22 kg per person per annum). 3.16 The major concerns with food availability center around its distri- bution. In the past, during years of shortage, cereals were slow to move to affected regions. The cities were generally the first recipients of imports while the neediest regions, which were often the least accessible were the last. These are usually the regions where dry land wheat is produced. 1/ 1/ The main dry-wheat growing areas (the provinces of Jowzjan, Badghis, Fariab, and parts of Herat), are mountainous regions not yet connected to the all-weather road system. - 42 - During the disastrous droughts of 1970-72, such regions did eventually re- ceive aid, but not before many families had lost their entire wealth. 1/ The problem lies in poor communications and transportation facilities, and inade- quate administrative procedures. 3.17 Food is far and away the most important item in the family budget in Afghanistan. According to the 1968/69 consumer expenditure survey in the Lashkar Gah area, rural families spent 65.6 percent of their expenditure on food, and urban families 60.7 percent. 2/ Typical daily meals in the house- hold of a laborer or small farmer consist of nan (a wholewheat unleavened bread with a flat irregular oval shape, about a foot long and six inches wide) and tea (no milk, but plenty of sugar), with a soup or sauce and perhaps yoghurt at noon and evening meals. Fresh milk is rarely consumed. On special occasions much more elaborate meals will be prepared, consisting of different rice pilaus, meat dishes, and sweets. And depending on the season, meals are supplemented by the plentiful fruits and vegetables. In the isolated, moun- tainous areas that grow no fruits and few vegetables, diets are more monotonous. Surveys suggest that the population prefers a varied and healthy diet if they can afford it. A survey carried out in a village in northern Afghanistan indicated a high income elasticity for meat, fruits and vegetables at quite low income levels, and for milk products and eggs at higher incomes. 3/ 3.18 Children are the most vulnerable group to illness and their nutri- tional status is always of particular concern. The fact that Afghanistan has one of the highest infant and child mortality rates in the world adds to the urgency. Unfortunately, survey data are incomplete and often conflicting; 4/ nevertheless, strong preliminary conclusions can be drawn that point to a medical problem deeply rooted in traditional childbearing practices. An 1/ Either they were forced to sell their flocks or land, or to mortgage their land under a system called gerow. Under gerow, a landowner borrows against his land; however the lender maintains the usufruct as long as the debt is outstanding. As the borrower usually loses his chief means of repayment, in reality most farmers lose the use of their land for good. 2/ Source: "Lashkar Gah Household Expenditure Survey", Survey of Progress 1968/69, Ministry of Planning, Kabul, 1969. The actual disparity between urban and rural food expenditure may be greater. A study in a comparable area of Pakistan (Karachi in 1961) indicated a similar rural figure, but a lower urban figure (54.1 percent), see Ibid, Table 8. 3/ Source: CINAM, Services for Children within Regional Development Zones - Research and Action, Experimental Activities at the Village Level, Vol. II, UNICEF, Kabul, 1973. 4/ Most surveys have been conducted on mothers and children who have come to health clinics. As these children are more likely to be ill than children not brought to the clinics, surveys based on them are likely to bias the overall health picture. - 43 - example of this is provided by a survey undertaken by CARE. 1/ It was noticed that malnutrition was more frequent in 2-3 year olds than in the 2 year old or younger group. It was concluded that this was probably because the 2-3 year olds were more likely to have been wean'ed and were therefore dependent on inadequate and unmodified portions of the family diet. Miothers traditionally breastfeed children for between 24 and 30 months. However, in the event of another pregnancy breastfeeding stops abruptly. One village survey indicated that 67.5 percent of married women of child-bearing age had had two children within the last two years. In the likely case of another birth before the child reaches the age of two, he or she is suddenly subjected to an unsuitable and nutritionally inadequate diet. Milk is critical to the weaning process. However, in a survey done at a clinic in Kabul, only 22 percent of mothers mentioned feeding milk as a supplement. 2/ 3.19 The inadequacy of weaning practices is no doubt a handicap to child nutrition. However, even being breastfed for such long periods is no guarantee that infants are healthy. One third of the children who were malnourished in that survey were being almost entirely breastfed. Clearly the mothers' diets and health are of critical importance to infants. In the CARE survey, most mothers said they did not receive as much to eat as they would have liked while they were pregnant. Only 13 percent mentioned a milk product as part of their diet. This low consumption of milk is undoubtedly responsible for observed calcium deficiencies in mothers and children. Another survey exa- mined 471 children for malnutrition by the arm-circumference method in Baghlan, Helmand and Ghazni provinces. The results of this survey are summarized in Table 12. Table 12: NUTRITIONAL STATUS OF CHILDREN IN 3 PROVINCES - 1976-77 Possibly Age Normal Malnourished Malnourished 0 - 1 10.8 21.6 67.6 1 - 2 3.0 27.3 69.7 2 - 3 10.5 49.5 40.0 3 - 4 31.4 52.4 16.2 4 - 5 56.4 29.5 14.1 Source: MSH, The Village Health Worker: The Need and Potential as Determined by Survey in Three Provinces of Afghanistan, Kabul, 1977. Again there appears to be a general deterioration of health at age 1, as breastfeeding stops, and the consumption of solid food begins. The percent- age of healthy children rises, and the percentage of definitely malnourished 1/ CARE, Final Report, CARE Afghanistan Nutrition Survey, Kabul, 1970. 2/ CARE, op.cit. - 44 - falls steadily from ages 2 to 5. Nevertheless, at age 4, more than 43 percent of the children still display either possible or overt malnutrition. It must be remembered, however, that by age 5 about half of the original births have died along the way. Those that achieve age five are a tough and battered lot, and include the more sturdy. In another rural survey of 248 school children in the north, only 9 displayed no signs of nutritional deficiencies. 3.20 It is difficult to form a conclusive picture of the nutritional situation. Evidence suggests that it is more severe in rural areas than in the towns and cities. This can probably be explained in terms of higher urban incomes, greater variety in the foods available, and closer proximity to health facilities.. Deficiencies in iron, calcium and vitamins appear universal, as does the unsuitability of the diet on which children are weaned. Part of the problem is one of education; making mothers aware of the special nutritional needs of the young and making fathers aware of the special nutritional needs of expectant and nursing mothers. The consumption of milk in particular must be substantially increased. Other needs such as vitamin, mineral and protein deficiencies are more difficult to satisfy given the economic and physical environment of most Afghan families. Here, as well as for milk, there is scope for special distribution programs. (ii) Water 3.21 Water is the key to life in Afghanistan. Practically every source of water is exploited and in the presence of assured water, land of even the poorest quality is settled. Water is used to the limit; the same source often provides water for irrigation,.animal and human consumption, and personal hygiene. The more fortunate villages have independent sources of water, springs or karezes which are usually quite clean and reliable. Others must share water from streams and rivers. The water flows through the villages in open, multi- purpose canals (juis). Tests have shown that more often than not these canals are polluted before they even reach the village, and that if they aren't as they enter, they are when they leave. The least fortunate villages have no regular supply of water. In these villages water flows for a specified amount of time on a given day when it irrigates the fields, is used to wash clothes, and is stored in small reservoirs. These reservoirs (howz) are usually located in family courtyards beneath trees to reduce evaporation. Howz water has been found to be uniformly polluted. Some villages have shallow wells to tap groundwater. The water from such wells is usually less polluted than water from juis or in the howz, but there is no guarantee that it is safe. 3.22 Polluted water has been identified as a major cause of illness and disease in Afghanistan. Only about 700,000 people, about 5 percent of the population, have access to public piped water systems. The supply of clean drinking water to rural villages is the responsibility of the Environmental Health Department (EHD) of the Ministry of Public Health. By mid-1977 EHD had installed piped systems in about fifty villages. Most of these are deep wells which feed distribution networks containing public standposts. It has been estimated that these systems supply about 100,000 persons. EHD has also installed about 750 hand pumps that are estimated to serve about 200,000 people. However, a recent sample survey by UNICEF found that 50 percent of - 45 - the hand pumps and 60 percent of the power pumps were not operational. In such cases people had simply reverted to their original, usually polluted, sources of water. 3.23 The problem of polluted water is probably even more critical in urban areas. In Kabul city, before 1975, when the construction of modern piped water facilities commenced, piped water was available in only 14 per- cent of the houses (mostly the homes of the wealthy, and those with their own wells, pumps and storage tanks). Public pipes on the streets were used by only 28 percent of the households. Another 46 percent of the houses used public and private wells, while water was not readily available in 20 percent of the households. 1/ Until recently, the only other urban centers with piped water were the capitals of two provinces with special development projects - Helmand and Paktia. Piped urban water supply is the responsibility of the Central Authority for Water and Sewerage (CAWS), a quasi-independent Authority under the Ministry of Public Works. It currently operates five functioning water supply systems, and is in the process of expanding into eight further centers. 2/ Other major centers and small towns have no immediate prospect of obtaining water supply systems however. 3.24 The principal reason drinking water is contaminated is because primary sanitation standards are so low. Few people in rural Afghanistan are aware of the links between improper sanitation and polluted water, and as a consequence water-borne disease is rampant. Under such circumstances invest- ments in drinking water delivery systems and sewage disposal are of crucial importance. If these programs are to succeed there must be efforts to create an awareness of the importance of proper preventive health measures to induce the public to use and maintain the facilities once available. Inevitably it will take well beyond the present or even the next Plan period to reach the majority of the rural population. In the meantime, health education would also help to persuade the rural population to tackle the problems from within the community until such time as public services can be made available to all villages. (iii) Shelter and Fuel 3.25 In rural Afghanistan, housing rarely presents a problem. In the Lashkar Gah expenditure survey, it was found that rural families only spent on housing an average of 1.2 percent of their total expenditure. In urban families, this rose to 5.3 percent, and in the large urban centers it is undoubtedly far higher again. Rural house construction requires little cash: non-productive land is abundant, mud and straw are readily available, and much of the labor is provided by the family itself. Cash costs are limited to craftsmen and to the poplar trees used to reinforce the roof. Operating costs are low, usually confined to remudding the roof every two or three years. 1/ CARE, op.cit., Appendix 3, p. 6. 2/ Functioning systems are in Kabul, Mazar-i-Sharif, Herat, Kandahar and Jalalabad. - 46 - 3.26 The typical construction uses sun-dried bricks covered with a mud and straw plaster. Variations are numerous; in areas where poplar trees are unavailable, domed roofs are constructed using mud bricks, and in mountainous regions much more stone and wood (if available) is used. Most rural dwellings consist of a house, outbuildings and small garden surrounded by a high mud wall that serves to keep out intruders and keep in the livestock at night. In some cases, the entire village is surrounded by a high wall for extra pro- tection. In cities and more densely inhabited areas, only the wealthy can afford such compounds, and most houses are simply strung out along the main streets and the narrow alleys. 3.27 The typical home has 2 or 3 rooms. 1/ The floors are usually mud, and, if the owner can afford it, covered by colorful gilims (rugs) or carpets. There is very little in the way of furniture, wood being expensive. Cushions, rugs and mattresses serve instead. Most households have a few metal pots and trays for preparing food, pottery water containers, and china teapots and cups for serving tea. In the colder parts of the country cooking is done indoors to conserve heat; in the summer, almost all cooking is done away from the house. 3.28 Afghanistan has probably the lowest average temperatures and cer- tainly the severest winters of any country with a per capita income of less than $300. Fuel and warm clothing are thus of tremendous importance. Fuel is not in short supply in Afghanistan. The country's substantial reserves of coal and natural gas are yet to be fully exploited. However, fuels with low-tech- nology extraction -- wood, bushes, and even fallen leaves -- are utilized to the limit. For most people wood is the principal fuel but forestry resources are being depleted all too rapidly. In the face of such depletion, the price of wood has risen more sharply than other fuels (see Vol. II, Table 11.1). The high cost of wood makes people reluctant to heat their homes, and to boil water properly, both factors that adversely affect health. In the Lashkar Gah survey, fuel and energy needs accounted for about 9.6 percent of total expendi- tures in the urban areas and about 7.3 percent in the rural areas. 3.29 The only rural areas in Afghanistan with electricity are those near Lashkar Gah in the Helmand Valley. The few small towns that have electricity usually have it for a few hours in the evening only. By comparison, in some of the larger cities electricity supplies are adequate and most homes have electricity connections. In Kabul, 73.1 percent of the households already had electricity by 1968/69. The principal use for electricity is still lighting, but cooking and heating uses are increasing in importance. 2/ The problem of heating is gravest in the Hazarajat where the cold long winters are a cause of much suffering, and respiratory diseases are common. In the medium-term, coal may prove to be the most cost effective means of insuring adequate fuel supplies to the less accessible areas such as the Hazarajat. 1/ Urban homes tend to be smaller. The 1968/69 Kabul Household Expendi- ture Survey indicated that 24.6 percent of households had one room only. 2/ Source: Kabul Household Expenditure Survey, Survey of Progress 1968-69, Ministry of Planning, 1969. - 47 - (iv) Public Health 3.30 In few countries is the health situation as serious as in Afghanistan. Disease and illness are rampant, and the infant mortality rate is one of the highest in the world. So common are some afflictions like malaria, measles and tuberculosis that like high infant mortality they are simply accepted as part of life, neither unusual nor preventable. 3.31 The disease and illness pattern is largely the result of two sets of interacting factors; the ecological environment, and the failure to appre- ciate the importance of proper nutrition and personal hygiene. The few surveys that have been conducted suggest that incidence of disease is both region and season-specific. Representative of these surveys is the following compiled by doctors who accompanied an in-depth socio-economic study of a large (popula- tion 1,800) village in northern Afghanistan. Patients presented themselves with the following illnesses: Table 13: SEASONAL INCIDENCE OF ILLNESS IN SANSIZ, 1972-73 Diagnosis Winter (%) Summer (%) Respiratory illness 25.5 20.6 Digestive illness 19.1 26.1 Liver disease 2.9 2.3 Skin disease 6.6 7.8 Eye disease _ 4.4 Locomotor system (arthritis, etc.) 10.6 5.1 Nutrition related (anemia, fatigue, etc.) 14.6 15.5 Reproductive related 9.6 10.9 Circulatory 2.9 1.6 Other 8.3 5.7 100.0% 1,00.0% Source: CINAM, op.cit. Several conclusions can be drawn from the survey: (a) Respiratory and diges- tive illnesses are the two most prevalent complaints, accounting for almost half of the total. (b) They are both year-round problems, though as would be expected there is somewhat higher incidence of respiratory illness in winter and digestive illness in summer. (c) Malnutrition was noted as a symptom in about 15 percent of the cases. (In surveys where patients themselves were asked of their past illness, less than 1 percent mentioned malnutrition, or not enough to eat. Nor, in Afghanistan does malnutrition alone constitute grounds enough for admission to hospital.) 3.32 Studies into the nature of digestive system illnesses have revealed that they are for the most part water-borne. Dysentery, typhoid and para- typhoid infections all are extremely common. An epidemiological survey of four rural villages indicated that 32 percent of the population were infected with - 48 - different forms of Ascariasis including liver fluke, tapeworm and hookworms. 1/ Infection among children less than 10 years of age was 41 percent. Infection with amoeba was even higher -- between 50 percent and 80 percent of the popula- tion had at least one form of amoeba, and some had four varieties. However, for most adults it was not particularly debilitating, over time their bodies had developed immunity to the agents. Among young children symptoms were wide- spread though; on the day of the interviews and tests more than 50 percent of children less than 10 years of age had diarrhea/dysentery, a far higher pro- portion than for adults. In towns and cities the problem may be much worse -- in one Kabul survey 75 percent of the children under 18 years of age had Ascariasis. 2/ 3.33 Respiratory illness is extremely common. Inadequate protection against the cold, combined with undernourishment, makes people highly suscept- ible, and living together in crowded quarters makes transmission easy. The most common complaints are colds, coughs, pneumonia, and tuberculosis. Indi- cations are that tuberculosis is widespread in Afghanistan. The four-village survey found that almost 50 percent of the population showed positive reactions to the antigens. Furthermore X-rays showed symptoms of pulmonary TB in 6.5 percent of the population. Actual incidence of tuberculosis would be much higher, were it not for the healthy outdoor life most Afghans lead. A tuber- culosis institute is being built with aid from Japan. 3.34 Malaria is a major public health problem for about one fourth of the population. Although rarely fatal, it is nonetheless debilitating. In 1976, in a major outbreak in the Jalalabad, area, 20-25 percent of the population was infected, causing serious problems of labor shortages during the rice harvest. It is concentrated in three areas: (1) the Kunduz-Takhar region of the north; (2) the lowland provinces stretching from Nangarhar in the east around to Farah in the west; and (3) the foothill regions of the Hindu Kush. The problem is greatest in the former two regions, which include the main rice growing areas. Malaria is definitely on the rise. From a few hundred cases in 1966, malaria has risen to 85,000 cases in 1975/76 and 123,000 in 1976/77. 3.35 The highly endemic nature of so many serious illnesses, the general state of malnutrition and the inadequacy of health care have given Afghanistan one of the highest mortality rates in the world; as high as 30 per thousand. As discussed earlier, life expectancy at birth is also extremely low -- 35 years on average. The ultimate objective of development in Afghanistan is a better and longer life for its inhabitants. To raise life expectancy, it is apparent that the major thrust will have to be in the spread of preventive measures which reach large numbers of people which will reduce the need for programs which treat those who are already ill. 1/ Buck and Buck, Health and Disease in Rural Afghanistan, Baltimore: Johns Hopkins Press-1972. 2/ CARE, op.cit., Appendix 3. - 49 - (v) Literacy 3.36 Literacy is extremely low in Afghanistan. It is highest for urban males and lowest for rural females, as the following table indicates: Table 14: LITERACY: AGE 6 AND ABOVE IN AFGHANISTAN, 1972/73 Rural Urban Total Male 15.7% 35.5% 18.7% Female 0.6% 14.8% 2.8% Total 8.8% 25.9% 11.4% Note: Literate defined as being able to both read and write. Source: ADS, Vol. III, pp. 47-55. Due to expanded primary education in the past two decades the younger age groups are more literate than the older. For example, both sexes combined, in the 15-24 age group about 20 percent are literate, in the 25-49 age group about 10 percent are literate, while of those above 50 only about 7 percent are literate. 3.37 Attitudes to education vary greatly. Villagers have traditionally been wary of government and have tended to regard most government services with distrust and suspicion at first. However, sustained contact with ser- vices like health and education often replaces this distrust with enthusiastic support. As a consequence, attitudes to education currently vary from strong enthusiasm in the cities and large towns where it is recognized as a prime avenue to advancement in society and achieving a secure future, to suspicion and even hostility in the less accessible regions. There the need for educa- tion is less clearly perceived; while desiring their sons to be able to read (the Koran in particular), there is a fear that once they can read, they will leave the family and village for better opportunities elsewhere. This is all too likely to be true, given the limited opportunities to use education in the villages and small towns of Afghanistan at present. Many parents are also reluctant to send their children to school as they contribute significantly to work around the house and in the fields. Sentiments are particularly strong against the education of daughters - in all but the largest towns and cities it is felt to be unnecessary. The only education they need, it is widely felt, is how to cook and otherwise run a household. 3.38 These attitudes are familiar from many developing countries and they do not linger very long after the development process begins to make its impact felt. In Afghanistan widespread literacy is important not merely so that a pool of educated, trained manpower can be made available. It is critical to the development process and the objective of meeting basic needs. It is a matter of people being able to use the banking system, to maintain records, to read instructions, to understand taxes, etc. It is equally a matter of - 50 - providing information on the importance of clean water, proper nutrition and personal environmental hygiene. Literacy and education are necessary both to promote and to enable the population to adjust to the radical changes in their way of life, which will take place as the modernization of Afghanistan proceeds. C. The Level and Distribution of Income 3.39 The success of any development strategy in Afghanistan will be mea- sured by its impact on the living standards of the vast majority of the popu- lation. The efforts of the past have touched only a small minority who have been drawn into the modern sector in the urban areas. As the preceding sec- tion demonstrates, only a small proportion of Afghanistan's population has its basic needs adequately met at present. Obviously the problem is most serious for the very poorest groups, and the highest priority attaches to alleviating their situation. Some of the elements this would involve, like health care and education, can only be delivered effectively through national programs; however, many more including food, clothing and energy needs are more effectively delivered through the market. But as a mechanism of wide- spread distribution, the market can perform only as well as need can be con- verted into effective demand. To ensure that the needs of the poor can be satisfied through this channel it is necessary that they have sufficient purchasing power to do so. To the extent they lack the means to satisfy their needs, either incomes in general are too low, or they are distributed inequitably. In Afghanistan, both are the case. 3.40 The first step is to define poverty in the Afghan context and to identify the groups whose need is the greatest. The mission's calculations suggest that in order to purchase the basic necessities of daily subsistence, a disposable income, in cash or kind, of about $85 per capita per annum is needed. (This compares with GNP per capita of $180.) Those who are below this level fall into the category of absolute poverty. (The calculation of the threshold figure for absolute poverty is given in full in Volume II, Part II, Section 2). 3.41 Who are the poor and how many do they number? It is likely that at least 20 percent and perhaps as many as 40 percent of the population live in absolute poverty. The problem is probably less serious in the towns and cities, though the available evidence is not conclusive. Income distribution data are only available for two urban centers, Kabul and Lashkargah, neither of which can be regarded as typical. Data drawn from an expenditure survey in Lashkargah, which is the centre of a rich agricultural area irrigated by the Helmand Valley Development Project, suggest that only 15 percent fell into the absolute poverty group in 1968/69, the years of the survey. Using the expendi- ture weights drawn from the Lashkargah survey to analyze data collected in a survey of Kabul suggests a higher figure of 30 percent. 1/ The urban poor 1/ Based on "Kabul Household Expenditure Survey", Survey of Progress 1968/69, Ministry of Planning 1969, see Volume II, Tables 14.2 and 14.3. - 51 - would consist of casual laborers who do not have steady employment, and small traders. $85 a year translates to an income of Afs. 85 a day for an average Afghan family of 6 or 7 people, on the assumption of a six-day work week. This compares with a wage rate which varied between Afs. 40 and Afs. 70 a day in 1977, depending on seasonal labor needs and the kind of work. 3.42 The only survey work done on the distribution of-income in urban areas has been done in Kabul, and is unlikely to reflect the general urban distribution. The survey suggests that income is extremely skewed - the bottom 56 percent of all households earn only 15.0 percent of the income whereas the top 6 percent earned 49.2 percent (see Volume II, Table 14.2). This implies a concentration ratio of 0.53. Information on other urban centers does not exist; however, the Lashkar Gah expenditure survey in 1968 indicated a relatively equal distribution of expenditure in that town. The top 6.3 percent of the households account for 17 percent of the expenditure, while the bottom 63.9 percent account for 41.6 percent. This is consistent with the general impression that outside of Kabul in which such conspicuous consumption as there is in Afghanistan is concentrated, there is relatively little inequality of expenditure as opposed to income, in the smaller towns and rural areas. 3.43 The problem of poverty appears more serious in the rural areas. Based on small survey of 12 villages in 7 provinces undertaken by the Ministry of Planning in 1970, between 11 percent and 60 percent of the population of these villages lived in absolute poverty. This survey is obviously far too limited to allow extrapolation to the national level; however, it does serve to illustrate the extremely direct linkages between land per capita, average per capita incomes and the degree of absolute poverty. The data are shown in Table 15. Table 15: AVERAGE ANNUAL PER CAPITA INCOME AND LAND AVAILABILITY, 1970 Land- % of Pop- Average Irrigated Equivalent/a ulation in Sample Per Capita Total Per Capita Absolute Province Population Income (Jeribs) /b (Jeribs) /b Poverty /c Baghlan 1015 6670 2432 2.40 11 Kandahar 990 5631 2369 2.40 25 Kunduz 1125 4508 2866 2.54 21 Parwan 684 2653 632 0.92 48 Ghazni 1633 2514 1746 1.07 59 Nangarhar 1094 2041 1014 0.93 60 Laghman 385 2671 493 1.28 47 /a Dry-farmed land productivity assumed 1/3 irrigated equivalent. /b Five jeribs equal one hectare. /c Based on 1969/70 absolute poverty level, calculated to be Afs. 2907. Source: Ministry of Planning, Survey of Progress - 1970-71. - 52 - The strong correlation between agricultural land per capita and incomes and poverty is borne out in Table 15 by a comparison of Baghlan, Kandahar, and Kunduz on the one hand with the remaining provinces on the other - the former have roughly twice the agricultural land per capita and only about half as much of their populations are among the absolute poor. 3.44 Another important point emerges from this survey. The availability of additional land often has a disproportionate effect on income, because it permits farmers to diversify production out of the major subsistence food crops and into high value cash crops. Baghlan, for instance, has some of the best agricultural land in the country. There is also adequate irrigation water and rainfall. Adequate rain means that wheat can be grown on dry land, thus enabling the highly productive irrigated land to be devoted to cash crops, including rice, cotton and sugar beet. Similarly, in Kandahar where the climate is conducive to grape-growing, 10 percent of the land in the survey was devoted to grapes which yielded 42 percent of total income. Grapes were also grown by some farmers in Parwan. The farmers in Kunduz with their large farms were able to raise many cash crops, including rice, cotton, and melons alongside their wheat, but in Nangarhar, Ghazni and Laghman with much less land per capita, almost all the land was devoted to the production of rice and wheat, with some corn and vegetable production. 3.45 Who are the rural poor? Those who live off the land may be divided into four categories: landowners; share-farmers who receive 50 percent of the eventual crop and supply both inputs and labor; share-laborers who receive 20 percent of the eventual crop and supply only labor; and casual laborers who are employed irregularly. Many village income earners fall into more than one category. The average of land per villager is therefore a rather good index of the average living standard, since land represents a pool of potential in- come which is available for distribution. Given the low level of mechaniza- tion, large landowners have little choice but to give out the land beyond a size which can be operated by their own family, for sharecropping, or hire laborers. While it is therefore the ratio of total land cultivated to total population which is of major significance, its distribution is also important. Owner-operated land could by definition support double the population of share- farmed land if it is assumed that the surplus income earned by the larger landowners would not generate any other employment in the village economy. 3.46 The ratio of land to population is a rather complex one in Afghan- istan. Thus irrigated land yields per hectare are on average about 4 times those of dry land. The introduction of improved wheat varieties on irrigated land almost doubles its return per hectare, while land that can be double- cropped with cotton and improved wheat would yield five times the return of irrigated land cropped with traditional wheat, and 20 times the return of dry land wheat per hectare. This is illustrated in the matrix contained in Table 16 below: - 53 - Table 16: SUBSISTENCE FARM SIZE, 1975 /a Share Share Owner- Farmed Labor Operated (50%) (20%) Dry land wheat 21.1 ha 42.2 ha 105.5 ha Irrigated land - unimproved wheat only 4.8 9.6 29.0 Irrigated land - improved wheat 2.8 5.6 14.0 Irrigated - double cropped cotton, wheat and other crops with adequate irrigation and improved conditions 1.0 2.0 5.0 /a For details of farm models (based on 1 ha model) see Khanabad II Project, IBRD Appraisal Report, Annex 18. The data in Table 16 is drawn from the Kunduz area. Kunduz is one of the wealthier provinces cited in Table 15 and it is possible to relate the two tables although they use different units. Thus, Table 16 suggests that un- improved wheat on irrigated land requires 4.8 hectares or 24 jeribs for family subsistence. Using an estimate of 6 members per family, this would mean that 4 jeribs are needed per person. The requirement would of course be much higher with share-farming or share-labor. In Kunduz, however, according to Table 15 only 2.5 jeribs are available per person. Thus even with equal income dis- tribution, Kunduz could not support its present population with traditional wheat. On the other hand, a shift to the most efficient technology in Table 16 would mean that less than 1 jerib is required to support each person. There is a good deal of double-cropping in the Kunduz area so that the data are quite consistent with this. It is more disturbing however to see the very low land availability in the Parwan and Nangarhar provinces. In these cases it is only a combination of very high levels of productivity and equitable in- come distribution which can result in a broad improvement of living standards. 3.47 Judging from the 12-village survey, income distribution in the rural areas appears to be more equitable than in the urban areas or at least than in Kabul. The survey indicated that the bottom 50 percent of households earned between 15 percent and 25 percent of total income, while the upper 10 percent earned 30 percent to 40 percent. Land tenurial patterns did not appear to play a significant role in determining overall distribution; some of the most inequitable distribution appeared in villages where over 85 percent of the farmers were owner-operators, while some villages with between 40 percent and 50 percent sharecroppers showed no more inequity than other villages with only about 20 percent sharecroppers. It would not be fair to draw the conclusion from this that tenure plays no role in income distribution however. Its impact is almost certainly being masked by the more important effects of availability, distribution and quality of land. Other things being equal, the greater the percentage of sharecroppers among cultivators, the greater the percentage of land sharecropped, and the more stringent the terms of sharing, the more inequitable the distribution of income is likely to be. - 54 - 3.48 Land quality and availability per capita and distribution appear to be the major variables explaining the distribution of income in rural Afghanistan. A 1967 government survey of about half the landowners (618,000) and half the cultivated land indicated the following distribution: Table 17: LAND DISTRIBUTION IN AFGHANISTAN, 1967 Size of Holding Percent of Holders Percent of Land (hectares) 0 - 0.5 40.0 4.0 0.6 - 3.9 40.0 25.0 4.0 - 19.9 17.8 29.0 20.0 - 99.9 2.0 34.0 100+ _0.2 8.0 100.0% 100.0% Source: Smith, et. al., Area Handbook for Afghanistan, 1973, p. xxxvi. According to this study, the poorest 80 percent of the landholders own about 29 percent of the land. 1/ These figures are distorting, however, since no distinction is made between irrigated and dry farmed holdings. Dry farmed holdings are almost invariably larger; necessarily so, to bring equivalent farm income. In addition, the survey overlooks the varying potentials of different types of agricultural land; quite often only a fraction of owned and techni- cally arable land can be farmed due to lack of sufficient water. Some irri- gated land receives sufficient water to irrigate two crops while other land has enough for only one. Indications are that the distribution of the best agricultural land is not as skewed. The 12 village survey cited above was conducted in provinces in which soil quality was known to be good and in vil- lages that farmed almost exclusively irrigated land. Agricultural conditions were thus more uniform and the overall concentration ratio for land ownership was 0.36, considerably lower than the 0.69 figure derived from the above table. In some areas such as the southwest, there are known to be individuals owning thousands of hectares, all of it farmed by hundreds of sharecroppers. In these areas, the distribution of income is bound to be far more skewed. 3.49 What conclusions can be drawn about the level and distribution of income in Afghanistan? Obviously absolute poverty is a problem. As compared to a poverty threshold of $85, the average rural per capita income derived in the survey of 12 villages, translated into current prices works out at about $120. By comparison it works out at $180 for the town of Lashkar Gah and $240 for Kabul. And indications are that the gulf between Kabul and the rest of 1/ Actual distribution is likely to be more skewed given the tendency to underdeclare. - 55 - the country is widening. The relative affluence of Kabul is understated by the figures since it is not only disposable income in which it shares disproportionately but relatively adequate government services, many of which are free or subsidized as well. This reflects a development strategy which has been geared to creating a modern sector operated by the Kabul-based bureaucracy, instead of modernizing the traditional economy through a decen- tralized administrative approach. The solution is obviously not to impoverish Kabul, but to shift priorities to the needs of regional and rural development. 3.50 The message is clear. Per capita average levels of income and pro- ductivity in the rural areas are simply not high enough. For those who fall into the category of the absolute poor this means serious deprivation in bad crop years, and malnourished nursing mothers and children even in good ones. Even for the majority of the rural population, who can afford the minimum needs of food, clothing and shelter, there is little surplus to be saved and re-invested, or, for that matter, taxed so that the Government can supply education, health services and clean water. Afghanistan's development stra- tegy must combine higher rural productivity with a direct effort to meet basic needs. The redistribution of land, the major rural asset is critical to insuring that the benefits of higher productivity in the future will be spread among the population, though its immediate impact on improving living standards is likely to be limited. D. Attacking Poverty 3.51 The reader can be forgiven for finding the, description of various aspects of life in Afghanistan a depressing one - indeed with respect to standards of education and health, an appalling one. Yet the traveller in the Afghan countryside would not find his experience depressing. On the contrary he would appreciate many of the strengths of the traditional way of life, particularly the sense of closeness between the individual and his community, which has been all but lost in many modern environments. Poverty in Afghanistan is for the most part the poverty of a traditional rural society untouched by development and unchanged for centuries. This is not the poverty of displaced rural squatters or teeming urban slums. It is a poverty that is accepted as the inevitable accompaniment of human existence. The policy-maker has in his hands knowledge and innovations which could substantially improve the quality of life in traditional society - modern medicine, education, production inputs and techniques. The test is to introduce these in a way which is consistent with, and builds on the strengths of modern Afghanistan. 3.52 The development which has taken place so far has been of the enclave type, drawing off participants from the traditional society, while leaving the basic fabric of village life unchanged. It is a far easier course of action than going to the villages and attempting to change them from within. This report advocates the latter approach, of bringing improved health, literacy, food, shelter, fuel and consumer goods to the village and of increasing rural productivity and income. To be effective, such an approach must take account of the special character of rural Afghan society. There is little real alternative, however, if living standards are to be raised. The strategy of urban-oriented capital-intensive development cannot reach a significant proportion of the population within an acceptable time-frame. - 56 - 3.53 The elements of this strategy emerge clearly from the preceding discussion. The most obvious element of the approach is to raise levels of output and productivity. Chapter II argued that earlier attempts had not succeeded or had only limited success. The past strategy was directed at food self sufficiency through higher wheat production and a supporting industrial base substituting for imports. Infrastructure was based largely on the needs of industry, through the construction of major roads and the provision of ample energy supplies to Kabul and other industrial areas. Afghanistan's major production potentials appear to lie in the processing of agricultural surpluses. These are smaller scale activities, which have been shown to be well within the managerial capabilities available in the country. They would also have greater benefits in employment terms than the capital-intensive projects pursued earlier. Of course this strategy would also imply a quite different development of infrastructure, of educational facilities, of banking and communications. These would have the concomitant advantages of enabling basic needs to be met more quickly and widely than otherwise. 3.54 The second element of the attack on poverty in Afghanistan is a program which is directed at meeting basic needs. These needs are being met substantially in Kabul, hardly at all anywhere else. It is understandable that the capital should have better facilities than other cities; it is the logical way for major nation-wide programs to get off the ground. It is less under- standable that after these programs have been operating for ten or fifteen years they should still focus almost exclusively on the Kabul area. Further- more the provision of these needs in the Kabul area is heavily subsidized by the Government although the main beneficiaries are rarely the neediest sections of the population. The emphasis has been on building high quality hospitals in the capital rather than small basic health centers in the rural areas, on urban high schools rather than rural primary schools, on food subsidies for civil servants rather than food supplies for inaccessible areas. The analysis needs to be turned around. Until now there has been a central program orga- nized and it has been planned to spread it judiciously from the center outwards. Unfortunately the lack of implementation capacity has often meant that it has remained confined to the center. The approach must begin by analyzing what the villager needs and evolve feasible delivery systems to supply those needs. 3.55 These two objectives can best be achieved through a program of regional and rural development. Such a program would begin with the planning process. Local production potentials must be identified, infrastructure needs must be delineated and the gaps in social services must be assessed. The next stage would be to prepare investment projects, to decentralize administrative structures and to formulate appropriate incentive policies. The traditional system in Afghanistan has strong elements of community participation which could provide a precedent for tapping local initiative. Such a strategy would obviate the need for difficult choices. The same infrastructure that enables small processing units to be set up in the market towns can be used to bring health care to the villages. High schools and colleges will train a new generation of local leaders, capable of playing the major part in the new industries and social services. - 57 - 3.56 Two other areas will require attention, not so much to promote development, as to safeguard the gains over the longer-term. These are income redistribution and population planning. While the immediate effects of re-distributing income and assets in Afghanistan would be limited given the low level of aggregate income, some movement in this direction will be a necessary condition of insuring a wide distribution of the future benefits of growth. Land reform in particular has a role to play in providing motivation for investment. Redistributing income also implies a reorientation of the fiscal system. At present the role which the fiscal system is playing is unrelated to income distribution objectives. The effect is often to provide free or subsidized services to those who could afford to pay economic prices. The result is that the distribution of services to those who cannot afford to pay is likely to be held up in the future by limited financial resources. While the tax system in Afghanistan is generally progressive with respect to income, its incidence on the rural population is high relative to public expenditures in the rural areas. Since most of the poor are located in the rural areas, the effect of drawing income off from these areas to pay for industries and public services in the cities is likely to be regressive. 3.57 The final element is the need for population planning. Over the long-term Afghanistan will find it difficult to maintain adequate growth rates of per capita income in the absence of effective measures to contain the growth of population. Afghanistan's current rate of population growth is 2.2 percent per annum. If it is assumed that GNP grows at 4 percent per annum and the population growth rate is unchanged, then by the turn of the century, per capita income will have reached $260. With population growth reduced to 1.2 percent per annum, per capita income would be subtantially higher at $335. A similar impact could of course be achieved by a one percentage point rise in the GNP growth rate. The difference is of course even more striking if projected over a longer time-span. But the argument for population planning is also a component of meeting basic needs in Afghanistan. Studies indicate that the number and spacing of births in Afghanistan have had detrimental effects on the health of both mothers and children. Family planning programs are likely to be an important aspect of the overall effort to improve health. 3.58 Subsequent sections of this report will attempt to delineate the specifics of this approach; It is obviously rather different from the approach which has been spelled out in the Seven-Year Plan. Yet the differences are in many cases more in presentation than in substance. Thus there is little question of the commitment of the leadership to rural development, to meeting basic needs, to higher agricultural output, to land reform. Most of these programs are included in the Plan along with the large capital-intensive projects. In the past when these programs have been included they have often been held up for lack of administrative capacity, while the big projects have gone ahead. Perhaps being less visible they did not attract the interest and priority which would have led senior administrators to cut through the morass of red tape which surrounds decision-making in Afghanistan. And perhaps it is in the different sense of priority that this Report does indeed differ from the Plan. - 58 - PART II: SECTORAL PROGRAMS: THE VEHICLES OF DEVELOPMENT IV. THE AGRICULTURAL ECONOMY V. PRIVATE NON-AGRICULTURAL ENTERPRISES VI. STATE ENTERPRISE IN INDUSTRY AND MINING VII. PHYSICAL INFRASTRUCTURE VIII. EDUCATION AND MANPOWER IX. THE PUBLIC HEALTH SITUATION - 59 - IV. THE AGRICULTURAL ECONOMY A. Agriculture in Afghanistan at Present 1/ 4.01 Present day agricultural practices in Afghanistan have been estab- lished over many centuries. Only in the past few decades has any notable new technology been introduced, in the form of modern engineering construction for water storage with improved water distribution for irrigation, and development of intensive crop production using chemical fertilizers. Thus an essentially pastoral system dominated by the seasonal migration of flocks of about 20 mil- lion sheep and goats between winter grazing on the semi-arid plains and summer pastures in the rugged mountain ranges has been progressively strengthened by the growth of a sedentary irrigated cropping base. Very well adapted husbandry practices and associated breeds and varieties of livestock and crops have enabled the extremely hardy population to gain a reasonable subsistence living from a rather difficult agricultural environment. At this stage over 80 percent of the population are rural, living in about 20,000 villages con- taining more than 1.2 million farm families in the lowland valleys, and nearby plains, and providing winter bases for about 200,000 nomadic families. Villages are located where water can be obtained by diversion from rivers, or from underground sources through karezes or wells, to enable irrigated crop production, primarily wheat, but with cotton, fruits and vegetables increasing in importance. Although irrigation structures are rather primitive, farmers have developed quite impressive skills in irrigation practices. Thus just 2.6 million ha of irrigated land provides 85 percent of all food and industrial crops, while crop residues and forage supply supplementary and winter feed for the national flocks and herds. Of the country's total land area of about 65 million ha, arable land is estimated at 8 million ha, of which about half is planted annually due to lack of irrigation water and the need to fallow rainfed areas. The extensive semi-arid plains and mountains provide over 50 million ha for winter, spring and summer grazing. (i) Physical Resources 4.02 Topography and climate together impose severe limitations on land use in Afghanistan. The Hindu Kush mountain range occupies the central and northeastern parts of the country rising to an elevation of over 20,000 feet in the Pamirs of the Wakhan Corridor with the land falling away to 1,000 feet along the banks of the Amu Darya river. The rugged central mass of steep ridges and gullies carry sparse vegetation, with the main river sys- tems flowing down to wide arid plains which fan out to the frontiers on the northern, western and southern periphery. The climate is arid continental, characterized by hot dry summers and cold winters when all precipitation 1/ For a more detailed description see Bank Report No. 848a - AF. "Afghanistan: Opportunities for Agricultural and Rural Development Sector Report". - 60 - occurs. The western desert areas receive less than 100 mm annual rainfall increasing eastwards in the higher elevations of the Hindu Kush to 1,170 mm at Salang. Above the 9,000 foot contour most of the precipitation is snow which serves as natural water storage, melting to provide irrigation water during spring and summer. A particular feature of the climate is the wide variation in the amount of rainfall between years and its distribution during the season. Low rainfall in 1969/70 and 1970/71 caused very serious reductions in cereal crop yields in 1970/71 and 1971/72 while the effect on pastures was even more disastrous causing sheep losses estimated at 8 million head or 40 percent of the national flock. Temperature variations, with an average range from 30 degree C in July to 3 degree C in January, impose further constraints on husbandry practices. In some areas, during the winter from November to March, temperatures may fall below -20 degree C so that growth of winter wheat, sown and germinatqd in November, can be inhibited until the following spring. Most of the arable areas below the 5,000 foot contour experience an average of 240 frost-free days. In the western desert areas extremely low humidity in the hottest summer months causes very high evaporation which is accentuated by strong wind's which blow almost continuously between June and September. In the absence of natural wind breaks, mud walls are constructed in the irrigated areas to provide protection to crops and orchards. Soils in the major river valleys are mainly alluvial while extensive foot hill areas in the north, originating from weathered loess, are cultivated for rainfed wheat. Soils are generally highly alkaline, low in organic matter, nitrogen and phosphorus but, where there are no drainage problems, are very suitable for intensive irri- gated cropping once they are improved through the incorporation of alfalfa in the rotation. 1/ (ii) Farmers and Farming Systems 4.03 Afghanistan's population is essentially rural based and unlike many developing countries, the rate of migration from the country to towns is relatively low. Indeed with the exception of the capital, Kabul, the towns maintain intimate ties with their farming hinterland for which they provide market outlets, service centers and sites for agro-processing industries. Most towns and villages are located in the center of intensive irrigated areas and the agricultural population of farmers, sharecroppers and wage labourers live in these centers with few living in isolation on their holdings. 4.04 On the basis of the mission's estimate of Afghanistan's present population of 14 million, sedentary rural dwellers number about 10 million and nomads about 1.5 million. Allowing for some urban migration, the agricultural population is probably growing at nearly 2 percent annually which shows the need for increasing employment opportunities through land development, expan- sion of irrigation and intensification of farming systems, more rural indus- tries and handicrafts. To complement seasonal peak labor requirements labor 1/ See Volume II, Tables 7.1-7.4 for climatological data and statistics on land resources and land utilization. - 61 - intensive programmes to improve village infrastructure and services should be designed to provide off-peak employment. At present many villages lack road access and are often cut off completely by snow for many months in the winter. Few villages enjoy medical facilities, a hygienic drinking water supply or electricity, and there are only 3,300 village or primary schools and less than one quarter of primary school age children attend school. Very few girls attend school at any level. Literate farmers are few and far between. 4.05 Although Afghan farmers are rarely able to read and write or keep simple farm accounts, it is generally recognized that they are hard working and have developed a high level of technical skills within the limitations of traditional farming practices. They are responsive to price incentives for their crops though their first concern is to produce sufficient food (wheat) for family needs. The great majority of the estimated 1.2 million farm fami- lies live on holdings varying from 0.5 ha to 5 or 6 ha of cultivable land. Their very limited resources inevitably cause them to be rather suspicious of innovations and therefore practical demonstrations of improved practices, e.g. superior varieties and use of fertilizers, are needed to induce them to risk changing from traditional patterns. Like farmers in many developing countries the Afghan farmer has some reservations about motives and capability of cen- tral government services to provide worthwhile assistance. At the same time, he is inclined to expect such assistance to be provided free whether it be an improved irrigation system (for which no direct charges have yet been imposed) or even for inputs such as chemical fertilizers for which there is a rather high proportion of overdue loan repayments to the Agricultural Development Bank (AgBank), though there has been a constant improvement in loan recoveries. (iii) Farming Systems 4.06 There are basically two distinct husbandry systems depending on the suitability of land resources: intensive crop production based on irrigation, and extensive pastoral husbandry based on transhumance movement of sheep and goat flocks between winter and summer grazing areas. While the technology and skills employed in these systems are quite distinctive it is the close rela- tionship for mutual benefit which needs to be fully appreciated. 4.07 The transhumance or nomadic system covers about 80 percent of the sheep and goat flocks, estimated to number 20 million and 3.3 million respec- tively, which move each season from their winter grazing on the plains to the high mountain pastures of the Hindu Kush. The flocks travel almost entirely on foot between winter and summer grazing grounds, which are often more than 200 km apart, and cover distances of 6-10 km daily. Mortality is high and productivity low due to disease and the low level of nutrition resulting from overgrazing despite the fact that great care and skills are exercised by the shepherds in flock management. Extremely hardy and thrifty animals have survived by the process of natural selection. Only the crop residues, mainly wheat and barley straw, and a small amount of range hay are available for supplementary winter feeding to the transhumance flocks. Goats, which - 62 - generally run in mixed flocks with sheep, have been more successful than sheep in surviving drought and numbers are on the increase. Although not considered as commercially valuable as sheep they do make a substantial contribution particularly in meat and milk for home consumption. 4.08 Sheep flocks include about 30 percent karakul which are multipurpose animals and are managed in the same way as other transhumance stock. Careful selection of karakul lambs to be retained for breeding has to be made within a few days of birth when the majority of male lambs and about 25 percent of females are slaughtered for their pelts. In response to the much higher price for mutton there is a tendency to raise more karakul lambs for meat which, while increasing the pressure on range grazing and reducing the availability of ewes' milk for human consumption, is enabling high standards of pelt quality to be maintained. 4.09 The estimated 1.5 million nomadic population are almost entirely dependent on their flocks, though limited cash income may be earned by pro- viding casual labour for crop harvesting. A dynamic relationship between nomads and sedentary farming can be seen in a number of richer nomads buying irrigated land, while at the other extreme poorer nomads who lose their small flocks during droughts are forced to find employment on irrigated farms. About 20 percent of flocks are sedentary, remaining close to their owners' villages and feeding entirely on crop residues and nearby range grazing. 4.10 Irrigated cropping is the other distinct farming system, though it is also of crucial importance to the pastoral way of life. Afghanistan is a land of small farmers (although in terms of legal ownership a number of land- owners may have title to a disproportionately large area) with about 1.2 million cultivators operating an average of 3.0 ha of arable land each. Historically the major production input which the farmer could provide was his own labor and the result has been a very labor intensive irrigated husbandry system with water diverted from rivers and springs and human labor and animal draught for cultivation. Again, historically, first priority has been given to wheat pro- duction with the objective of ensuring family needs, of about 1.0 ton annual- ly, or the produce of about one-third ha of a single irrigated crop. Wheat straw provided feed for cattle and transhumance flocks. The impact of moderni- zation on this small-farmer, traditional, but intensive system, has been definitely favorable to improving its viability through still more intensive husbandry methods. Notably this change has resulted in the cultivation of higher value crops; cotton, sugar beet, grapes, vegetables and higher yielding wheat varieties, with increasing use of chemical fertilizers and chemical pesticides. While farm incomes are extremely modest and vary greatly, a family farm of 2 ha of good irrigated land is capable of providing the family with basic food needs and a cash income of Af 35,000 1/ which may be compared 1/ Based on a holding of 2 ha good irrigated land, with adequate reliable water enabling yields of 3 tons wheat and 2 tons cotton, 1.17 ha planted with cotton provides the main cash income of Af 35,000; 0.33 ha provides family wheat requirements; 1/2 ha for forage crops for livestock, and vegetables. - 63 - to a laborer's income of Af 15,000 (at Af 50 average daily wage rate). There is considerable scope for further intensification and therefore of raising farm incomes and extending the range of viability of a family unit to smaller holdings. (iv) Crop Production 4.11 Of the estimated 1975 GDP of Af 106 billion, about half was con- tributed by the agricultural sector. Agricultural primary products, or goods and handicrafts made from agricultural raw materials, amount to 80 percent of total exports. Over the past decade performance has been somewhat disap- pointing in that food production of which cereals are the major component, has failed to keep pace with population growth 1/. In 1976, domestic cereal production, though 28 percent above the average of 1961-65 in aggregate terms was 6 percent lower in per capita terms. This is in part explained, however, by acreage expansion and increased production of other crops. Non-cereal crops, of which cotton is by far the most important, have steadily expanded in output by more than 40 percent over the previous decade. 4.12 Cereals - wheat, rice, maize and barley - still, however, dominate the cropping pattern occupying about 83 percent of the annually cropped 2.5 million ha of irrigated land and almost all of the 1.3 million ha of rainfed land. Fruits and vegetables, industrial crops particularly cotton and sugar beet, and alfalfa and other forage crops occupy the remaining 430,000 ha of irrigated cultivation. A special program to increase wheat output through the use of improved varieties and chemical fertilizer, which was initiated in the mid-1960's, has succeeded in raising irrigated wheat yields from an average of 1.3 tons to 1.8 tons/ha. 4.13 Cotton is the most important industrial crop and, in response to strong export demand, which has been reflected in incentive prices to farmers, production has shown a steady annual growth from 71,000 tons of seed cotton grown on 55,000 ha in 1968 to 165,000 tons from 112,000 ha in 1976. Commercial cotton growing has been long established in the northern provinces of Kunduz, Takhar and Baghlan which produce about 50 percent of the total output, with yields of over 2 tons/ha in Kunduz and Baghlan. However prospects for further expansion of cotton production in the western and southern areas, such as Herat and Helmand are favorable. 4.14 Wheat and cotton compete with each other for the use of irrigated land and farmers are very responsive to relative price changes in deciding whether to switch from one crop to the other. The producer prices which have ruled for the past few years of Af 6.5 and Af 15/kg for wheat and cotton respectively, have favoured cotton as it is generally accepted that an equili- brium price relationship would be about 1:2, i.e. wheat would need to be raised to Af 7.5/kg. Apart from relative prices most farmers give first 1/ See Volume II Table 7.5, "FAO Agricultural Production Indices". -64- priority to growing sufficient wheat for family needs and only after this is assured would there be any switch to cotton. Thus farmers with several hectares of irrigated land can be more flexible in their cropping patterns. 4.15 Sugar beet has been cultivated commercially for many years in the vicinity of the only processing factory located at Baghlan. Current produc- tion of about 110,000 tons grown on 5,000 ha is limited by the capacity of the factory. The run down state of the equipment in the factory has resulted in poor rates of extraction of around 12 percent. Since sugar imports exceed 50,000 tons annually (at a cost of $36 million in 1975/76), the possibility of expanding domestic sugar production clearly merits careful attention. However sugar beet and cotton are in direct competition for good irrigated land and, at present world prices of the two crops, cotton production would be somewhat more attractive both to the farmer and the national economy 1/. However in the interest of a diversified farming system allowing.good crop rotations and varied by-products for stock feed, there appears to be a case for expanding sugar beet cultivation. During the present Plan it is unlikely that production of sugar beet in the Baghlan area would be increased to more than 200,000 tons which will be the capacity of the replacement sugar factory which is proposed to be built. Sugar cane growing is limited by climate to the Jalalabad area and there appears to be little prospects of increasing production of cane above the present 65,000 tons, which is processed by traditional methods into "gur". 4.16 Tree fruits, nuts and vines are grown commercially in Jalalabad, Mazar-i-Sharif, Kandahar and Parwan. Grapes account for about 30 percent of total fruit production, yielding both good quality table grapes and raisins. Mulberry is widely grown and its sun dried berries are an important item of diet, while it also supplies firewood and is supporting an infant sericulture industry. Melons are extensively cultivated and rank next to grapes in exports of fresh fruits. A wide variety of deciduous fruits; citrus, olives, nut trees including walnut, almond and pistachio, also contribute to total annual fruit production of 880,000 tons. Although the climate is generally favourable for irrigated fruit cultivation there is considerable scope for improving agronomic practices including greater use of fertilizers, disease control and better quality root stocks. 4.17 Vegetable production is estimated at 720,000 tons of which about 40 percent is potatoes. As exports are currently prohibited (except for a small quota which has been given to the Afghan Vegetable Export Company) virtually all vegetables are consumed locally giving a gross average per capita avail- ability of 43 kg per annum. Oilseeds output, mainly linseed and sesame, is 1/ On the basis of producer prices for cotton and sugar beet of Af 15/kg and Af 1,000/ton respectively at yields of 2 tons and 25 tons respectively per ha, gross value of production of cotton is 20 percent higher than sugar beet. Production costs of cotton would be somewhat higher due to harvest- ing expenses. Valuing cotton and sugar at 1976 prices, export of two thirds of a ton of cotton lint (i.e. the processed output from one hectare) valued at $1,600 per ton, compared to the import cost of 3 tons sugar at about $300/ton shows the foreign exchange earned by producing cotton to be 18 percent higher than the foreign exchange saving from sugar. - 65 - about 40,000 tons. Based on successful trials, preference is to be given to their substitution by sunflower. (v) Livestock Production 4.18 Animal products including wool, hides and skins, karakul pelts, and casings constitute about 15 percent of the value of all exports, while woolen carpets contribute a further 7 percent. All meat and milk (apart from imported donated milk products) are provided by domestic sources, and constitute an annual per capita level of 11.5 kg meat and 60 kg milk equivalent. Fresh milk is mainly consumed by families who own cows, and sheep's milk is only available in the country areas for about 2 months in the spring after lambing. Sheep numbers fell by about 40 percent as a result of the two year drought 1971- 1972, and the subsequent building up of flocks has resulted in reduced numbers available for slaughter as well as less karakul pelts for export. Although cattle are maintained primarily as draught animals, the number of work oxen in Afghanistan may prove inadequate to provide the power needed for crop expansion programs and there could be a need for expanded use of tractors. This should be the subject of careful study however. Poultry husbandry is almost entirely backyard scavenging while efforts to expand intensive com- mercial poultry production have not as yet made much progress; as a result poultry meat is relatively expensive. (vi) Forestry and Fisheries 4.19 Natural forests, which cover an area of 2 million ha including 0.3 million ha of wild pistachios in Badghis, are estimated to contain wood reserves of about 30 million cubic meters. The timber forests are located on the eastern slopes of the Hindu Kush and Safed Koh, mainly in the provinces of Konar and Paktia. It has been estimated that only about 500,000 ha are economically exploitable. The rate of felling, which is estimated at one million cubic meters annually with 60 percent wastage, is much higher than regeneration and reforestation with the result that reserves are rapidly being depleted. Traditionally Afghan farmers maintain stands of poplars in irri- gated areas and along the banks of rivers, streams and canals and this has been an important contribution to meeting the country's requirements of fuel wood, building poles, fruit cases and even furniture. 4.20 Fish production is very limited for obvious reasons though there are prospects for fish culture in some of the rivers and dams. B. Constraints to Development 4.21 The performance of the agricultural sector over the past decade has been disappointing. The very large investments in major irrigation structures did not realize quick returns through increased crop production because of the failure to gear them to land development and farming operations. Technical difficulties encountered in irrigation development are dramatized in the serious salinity which has appeared in large areas brought under irrigation - 66 - in parts of the Helmand Valley through the failure to incorporate an adequate drainage system in the project. However, the Helmand Valley development, in spite of its costly faults, does represent a major landmark in Afghanistan's recent economic progress. The project has provided the training ground for most of the present Afghan professional irrigation development personnel and has given them valuable experience in planning, implementation and operation of a major land and water project. Whatever the past failings, the Helmand Valley now makes an important contribution to the national economy, notably in supporting a rapidly growing cotton/textile complex and providing a sub- stantial surplus of wheat. 4.22 In spite of a major program initiated in the 1960's to expand wheat production through the use of-high yielding varieties, notably Mexipak, domestic production has maintained a precarious balance with the country's needs neces- sitating some imports in most years with critical shortages in the drought years of 1971/72 and 1972/73 when 200,000 tons had to be imported each year and many people suffered from severe food shortages. 4.23 The constraints have been identified in a number of World Bank sector studies and reports 1/ and indeed are well recognized by the Government in the development proposals for agriculture included in the First Seven-Year Plan. The most critical among the natural constraints is the unreliable rainfall. Uncertainty about the level and frequency of rainfall for winter sown crops and pasture regeneration, makes the timing of agricultural opera- tions extremely critical and restricts the possibility of double cropping in some parts of the country. In the eight year period 1968/69-1975/76 average rainfall was 362 mm but in two successive years 1969/70 and 1970/71 precipita- tion recorded was 29 percent and 35 percent lower than the average, with total wheat production of only 86 percent and 78 percent respectively of average production in 1971-1976. Better than average precipitation in subsequent years has enabled wheat production to increase to well above average levels. Apart from wide variations in year-to-year national average precipitation, differences are equally wide between different parts of the country, and during different times of the year. For the main rainfed cereal growing areas, February to April are critical months when inadequate rainfall can cause serious problems. This occurred in 1977 and resulted in almost total failure of dryland crops in the northern areas. 4.24 Although farming efficiency has certainly advanced in the Baghlan- Kunduz area and the Kabul river basin, in much of the country farming prac- tices are of a low standard both under irrigation and rainfed conditions due to lack of good seeds, limited use of chemical fertilizers and pesticides, poor animal health and husbandry practices and the absence of a rotation sys- tem which will allow integration of livestock with crop production at the farm level. As the majority of livestock are owned by pastoralists cropping patterns inevitably include very little forage crops. Farming practices are still very much conditioned by traditional attitudes in rural societies 1/ Bank Reports Nos. 848a-AF, 1324-AF and 1490-AF. - 67 - where 95 percent of the population is illiterate. Reluctance to innovate is undoubtedly yielding to the limited efforts of extension staff and the progres- sive though slow impact of education, communications and contacts which bring farmers into the market economy. Although great improvements have been made over the past two decades in main arterial routes, lack of access to remote areas persists and in many cases even areas close to urban centers are inac- cessible because roads and tracks become impassable to motor vehicles during winter. The continuing belief in and indeed need for self-reliance in basic food production is therefore reflected in priority being given to subsistence wheat cultivation to supply family needs. 4.25 The structure of farm ownership and tenure act as disincentives to improved farming in a number of ways. At the one extreme, large land- holdings are farmed by tenants and sharecroppers under inequitable conditions which do not encourage investment in land development or the use of modern production inputs. At the other extreme, there are many small, fragmented holdings with multiple ownership resulting from traditional inheritance laws. In many cases these do not constitute viable production units. The new land reform law proposes to set ceilings on land ownership and reallocate land above the ceiling in smaller holdings. Although it is difficult to be optimis- tic about the implementation of the land reform program, it could, if pursued with determination, result in a more equitable farm structure and more inten- sive production. The land reform law does not address itself adequately to the problems caused by present tenancy and sharecropping arrangements, and initiatives in this area should be a major components of future changes in the policy framework of the agricultural sector. 4.26 Perhaps the most serious land tenure issue is water rights. The traditional system results in inequitable water distribution favouring land- owners nearer the heads of canals who may overwater crops while farmers towards the bottom end of the system frequently receive inadequate water. This situation also militates against making improvements to the water dis- tribution system because landowners at the top end who often have most influence in the village, feel they would not benefit and would probably therefore not contribute to the cost of improvements. To date only a small part of the country's irrigation system has benefitted from the program of small-scale irrigation improvements which has been in progress during the past two decades, and the current Plan, if fully implemented, would affect only 400,000 ha or only 12 percent of the total irrigated area. Thus the greater. part of the irrigation system will continue for several decades to suffer from lack of storage reservoirs, primitive diversion and distribution systems, little exploitation of groundwater resources and inefficient and wasteful water use on the farms. 4.27 At this early stage in adoption of modern farming practices the shortage of technical and specialist agricultural skills is particularly noticeable. As mentioned in para 4.24 above, the present generation of farmers has been cautious in adopting new techniques, particularly in using expensive inputs like chemical fertilizers. The Ministry of Agriculture's - 68 - extension staff although adequate in numbers at present, lack the logistical support (housing, transport and equipment) and the technical training to pro- vide adequate advice particularly in farm planning and management. Livestock production has suffered from lack of veterinary services. 4.28 Systematic agricultural research is in its infancy and as yet is totally inadequate - in specialist manpower, facilities and clearly defined, problem oriented programs - to provide the basic technical and economic guidance which agriculture urgently needs. Primary responsibility for research lies in the Ministry of Agriculture which has 10 regional research stations employing about 120 professional staff. A major part of the research stations' effort and land has hitherto been devoted to raising foundation seed and fruit tFee root stocks, though much of this function has now been taken over by the Afghan Seed Company. In the view of the World Bank, research work has suffered from a critical shortage of finance and equipment, frequent moves of key personnel and lack of overall direction and continuity of specific programmes. 4.29 Some general institutional weaknesses in the agriculture sector are already well on the way to being eliminated with AgBank, the Afghan Fertilizer Company and the Afghan Seeds Company playing an effective role in delivering and financing essential inputs such as seeds, fertilizers and chemicals, veterinary drugs and mechanical equipment. However, the Plan foresees AgBank providing only Af 2.1 billion by 1982/83 in total short-term credit which is only about half of the cost of fertilizer which should be used in that year. Insufficient credit and inability to finance inputs from their own resources has limited farmers' ability to intensify production. 4.30 The overriding constraint to the development of Afghanistan's agri- culture appears to be the Government's inability to establish a consistent policy framework and provide effective supporting services. Although the shortage of trained and experienced agricultural professional staff at the policy, planning and management level has undoubtedly been a serious problem it is also true that existing skills available in the country have not been utilized as effectively as they could. Historically the Ministry of Agricul- ture has been given the task of initiating and implementing development programmes for the whole of the agricultural sector, but has never been given the necessary authority and resources. As a result of its inability to carry out its true functions, the Ministry's responsibilities have been reduced by hiving off a number of activities to specialized institutions which have a degree of autonomy and freedom from bureaucratic procedure. While a certain amount of decentralization is clearly desirable there is a real risk of lack of coordination, and duplication of extension and research efforts; for example, giving the new Ministry of Water and Power responsibility for on- farm water use appears misconceived as water should be treated as just one of the important farming production inputs. The responsibility of the Ministry of Agriculture for policies and planning for agricultural sector development, for overall coordination and supervision of Government agencies implementing agricultural projects and programs and for the provision of national services, notably research, extension, crop protection, animal health, economic studies and surveys and market information, has not been firmly established. - 69 - C. Potential for Agricultural Development (i) National Objectives 4.31 The First Seven-Year Plan (1976/77-1982/83) defines the main objec- tives for the agricultural sector as: increasing output of food products, notably wheat, and of industrial raw materials, both for domestic consumption and processing, and for export. The increases in physical output required to achieve these objectives are shown in Table 18 below: Table 18: PLAN AGRICULTURAL OUTPUT TARGETS (in thousand tons) 1975/76 1982/83 Increase (%) Grains: wheat 2,850 3,500 23 maize 780 950 22 barley 384 470 22 rice 435 530 22 Industrial Crops: cotton 160 350 119 sugar beet 100 350 250 sugar cane 60 160 167 Oil seeds 40 60 50 Vegetables 720 1,152 60 Fruits 880 1,170 33 Livestock: meat 162 270 67 milk 839 1,128 34 wool 25 31 24 karakul pelts ('000 pelts) 1,577 2,072 31 Within the Plan's increase in NNP of 6.2 percent annually, the agricultural sector's growth would be 4.65 percent. 4.32 In order to achieve this expansion in production the Plan provides the necessary additional physical inputs, notably an increase in the use of chemical fertilizers and improved wheat and cotton seed for the whole irri- gated area under these crops. The main capital investment would be to improve existing irrigation and bring new land under irrigation. A comprehensive range of measures to strengthen and improve agricultural services and institutions are also to be implemented. These include: doubling the number of extension workers; completing the Agricultural Research Institute and enlarging the research programs; greatly expanding the operations of AgBank which, in the last year of the Plan, will be making 181,000 loans totalling Af 2.1 billion; assisting the formation of agricultural and livestock cooperatives; and - 70 - strengthening plant protection and animal health services. Other notable measures to promote agricultural production in the Plan are land reform and land taxation, improvements in administrative procedures, planning and programming, and policies relating to stabilization of producers' prices. 4.33 In total the Plan allocates Af 11.3 billion for agricultural develop- ment and Af 32 billion for irrigation development, equivalent to 6.5 percent and 18.2 percent respectively of the national budget. While this is a con- siderable reduction in agriculture and irrigation's share from 34.2 percent in the preceding seven years it is already apparent that there are likely to be difficulties both in securing the necessary resources and in the readiness of some of the projects. 4.34 The Plan target for agricultural growth is very ambitious. Few countries have sustained agricultural growth in the 4 to 5 percent range over long periods of time. While this ambition needs to be tempered by a realistic view of the constraints on project implementation, the overall outlook remains an optimistic one given Afghanistan's agricultural potential in the longer- term. 4.35 Any assessment of the Plan targets must begin with irrigation. The Plan projects 397,000 ha to be irrigated by 1982/83, of which 62,000 ha will be newly irrigated land while the remainder will be improvements in existing irrigation. Many of the irrigation projects are however at very early stages in the project cycle, and have not yet been prepared, nor have financial com- mitments been obtained for them. This applies to major projects such as Kokcha, Chasme Shefa, Kamal Khan and Seraj. Other projects are more advanced but even in these the Plan's implementation schedule appears optimistic in the light of past experience. It would seem appropriate to allow for a shortfall of about one-third in the irrigation target, though this is not to argue that the projects proposed are poorly conceived. The preparation of a master plan for irrigation development is needed however to insure the optimum progress in relieving Afghanistan's most critical growth bottleneck. To be sure a number of studies of individual river basins are being undertaken, but there is a need to integrate these into a broad strategy for irrigation development. 4.36 The Plan projects fertilizer consumption to rise from about 70,000 tons in 1976/77 to 368,000 tons in 1982/83. This is optimistic in the light of the likely shortfall in irrigation development, since fertilizer use is largely dependent on progress in this area. A target of 200,000 tons by the end of the Plan would represent a substantial achievement and is in line with past growth rates adjusted for additional irrigation facilities. 4.37 The adjusted irrigation and fertilizer targets, combined with an allowance for extension and institutional factors, can be translated into crop yields for the purpose of projecting likely output levels. The yield of dry land wheat is expected to increase by about 1 percent per annum from 1980/81 onwards, because of improved seeds and better cultural practices as a conse- quence of the proposed integrated wheat development project. The yield in the irrigated area is expected to increase by about 2.7 percent per annum. This would represent an overall yield per ha 18 percent above the current - 71 - level, as compared to the Plan figure of 23 percent. Similar modest shortfalls are also projected for cotton and other crops. The result of these yield and irrigated acreage projections is growth in net agricultural value added of roughly 3.9 percent per annum as compared to the Plan target of 4.65 percent. Table 19 embodies the assumptions outlined above in its projections of alternative production patterns of wheat and cotton over the Plan period. (ii) Food Security 4.38 The catastrophic effects of the 1970/71 and 1971/72 droughts have highlighted the importance of national food security. In Afghanistan this is often interpreted as meaning food self-sufficiency, i.e. that the country should be able to meet its food needs without imports. Even this concept is susceptible to various interpretations. Food self-sufficiency could mean that food is stored in good years for re-sale in drought years, or it could mean that even in drought years there are adequate food supplies. It is this last meaning which is often the most popular as it implies very low prices in normal years. It makes little sense for Afghanistan to follow such a strategy however, and in any case it would be virtually impossible to sustain without a policy of price supports or scope for exporting. In either case it would be a very costly strategy in terms of the opportunities foregone for production of high-value cash crops. There is evidence that the Government is moving away from this extreme interpretation of food security. 4.39 In practice there are two reasonable alternative approaches to food security. The first lies in increasing domestic production of wheat to pro- vide sufficient surplus in good years to be stored as reserves for release in drought years. The second means relying on either ad hoc import arrange- ments when shortages arise or imports which are stored for distribution in lean years. Both solutions would require the Food Procurement Department (FPD) to buy surpluses, store quantities of 200,000-300,000 tons and arrange for country-wide distribution in drought years. To-date the main function of the FPD has been to procure and supply wheat flour to government employees. 4.40 The choice between the alternative strategies of food self-sufficiency and food security through imports must be looked at from two points of view - the national economy and the farmer. For the country as a whole, what is the difference between the two approaches? Obviously food self-sufficiency means that more land must be devoted to wheat production. In a trade-oriented strategy, some land is released for production of cash crops. In the calcu- lation in Table 19 below, cotton is taken as representative of other cash crops. Two scenarios are worked out which demonstrate, in Part III of the Table, the advantage of following a trade-oriented strategy. Modest addi- tional amounts of wheat would need to be imported, but they would be more than compensated by export earnings. During the next eight years, Afghanistan would earn $345 million more under the second strategy than the first. This is obviously a very substantial sum. In addition, because of the heavy effective taxation of cotton the fiscal impact of this would be sizeable. Earnings from wheat production could only be tapped by the fiscal system through direct taxes on farmers, or taxes on inputs and services. These are unpopular and administratively cumbersome. Table 19 .: ALTERNATIVE SCENIARIOS FOR AGRICULTURAL DEVELOPIMNT PART I: Wheat Self-Sufficiency 1976/ 1977/ 1978/ 1979/ 1980/ 1981/ lS82/ 1983/ 1964/ 19851 hlieat 77 78 79 80 81 82 83 84 85 86 1. Dry Land acreage ('000 ha) 892 892 892 892 883 874 866 657 848 84o yield/ha (tons) 0.696 0.570 0.696 o.696, 0.703 0.710 0.7170.724 0.732 0.739 output ('000 tons) 621 511 621 621 621 621 621 620 621 621 2. Irrigated acreage ('000 ha) 1458 1458 1490 1500 1494 1498 1503 1501 1522 1537 yield/ha (tons) 1.-59 1.62 1.67 1.71 1.77 1.82 1.87 1.93 1.96 2.00 output ('000 tons) 2315 2358 2487 2566 2645 2726 2811 2897 2984 3074 3. Total acreage ('000 ha) 2350 2350 2362 2430 2434 2491 2462 2464 2477 2487 yield/ha (tons) 1.21 1.22 1.33 1.34 1.38 1.39 1.45 1.50 1.54 1.58 output ('000 tons) 2959 2869 3108 3187 3266 3347 3432 3517 3605 3695 4. Demand ('000 tons) 2959 3024 3108 3187 3266 3347 3432 3517 3605 3695 9 5. Imports ('000 tons) 23 145 - - - - - - - - Cotton 6. Irrigated acreage ('000 ha) 115 115 91 89 102 107 109 120 107 103 yield/ha (tons) 1.43 1.49 1.55 1.59 1.67 1.73 1.79 1.86 1.92 2.0 output ('000 tons) 164 171 141 142 -170 155 195 223 205 206 Total 7. Total Irrigated Area under 1573 1573 1581 1589 1596 1605 1612 1621 1629 164o Wheat and Cotton ('000 ha) a/ 8. Import Cost of Wheat (million US$) 4.5 26.4 - - - - - - - - b/ 9. Export Earnings from Cotton 68.1 72.6 49.9 49.7 62.8 70.7 75.5 91.1 72.6 64.3 Table 19: ALTERNATIVE SCENARIOS FOR AGRICULTURAL DEVELOPMENT PART II: Trade-Oriented Strategy 1976/ 1977/ 1978/ 1979/ 1980/ 1981/ 1982/ 1983/ 1984/ 1985/ Wheat 77 78 79 80 81 82 83 84 85 86 10. Dry land acreage ('cOO ha) 892 892 892 892 883 874 866 857 848 840 yield/ha (tons) O.696 0.570 o.696 0.696 0.703 0.710 0.717 0.724 0.732 0.739 output ('000 tons) 621 511 621 621 621 621 621 620 621 621 11. Irrigated acreage ('000 ha) 1458 1456 1454 1452 1450 1448 1446 1444 1442 1440 yield/ha (tons). 1.59 1.62 1.67 1.71 1.77 1.82 1.87 1.93 1.96 2.00 output ('000 tons) 2315 2358 2428 2483 2567 2635 2704 2787 2826 2880 12. Total acreage ('000 tons) 2350 2350 2346 2344 2333 2322 2312 2301 2290 2280 yield/ha (tons) 1.25 1.22 1.30 1.32 1.36 1.40 1.43 1.47 1.49 1.52 output ('000 tons) 2936 2869 3049 3104 3188 3256 3325 3407 3447 3501 13. Demand ('000 tons), 2959 3024 3108 3187 3266 3347 3432 3517 3605 3695 14. Imports ('000 tons) 23 145 59 83 78 91 107 100 158 194 Cotton 15. Irrigated acreage ('000 ha) 115 117 127 137 146 157 166 177 187 200 yield/ha (tons) 1.43 1.49 1.55 1.59 1.67 1.73 1.79 1.86 1.92 2.0 output ('0nn tons) 164 174 197 21Q 244 272 297 329 359 400 Totals 16. Total Irrigated Area under 1573 1573 1581 1589 1596 1605 1612 1621 1629 164o Wheat and Cotton ('000 ha) 17. Import Cost of Wheat - 4.5 26.4 12.4 20.9 24.5 30.8 39.0 39.2 66.7 88.1 18. Export Earnings from Cotton 68.1 74.1 78.8 91.4 1o4.6 123.3 141.4 164.3 186.6 rpi.. Table 19: ALTERNATIVE SCENARTOS FOR AGRICULTURAL DEVELOPMENT PART III: The Strategies Compared 1976/ 1977/ 1978/ 1979/ 1980/ 1981/ 1982/ 1983/ 1984/ 1985/ 77 78 79 80 81 82 83 84 85 86 19. Net Import Cost of Wheat - - 12.4 20.9 22.7 30.8 39.0 39.2 66.7 88.1 (II-I)(million US$) 20. Net Export Earnings from - 1.5 28.9 41.7 41.8 52.6 65.9 73.2 114.0 154.2 Cotton (II-I)(million US$) 21. Exchange Benefits from - 1.5 16.5 20.8 19.1 21.8 26.9 34.n 47.3 66.1 Strategy II (million US$) a/ Based on the IBRD price forecast for wheat (f.o.b. North America) over 1977 to 1985 (see IBRD Report No. 847/77, June 1977, pp. 28-29); the projected annual average rate of increase is about 14 percent. A 40 percent premium for transport costs, estimated on the basis of available data, has been assumed to obtain the c.i.f. Kabul equivalent. b/ The average 1976/77 f.o.b. Kabul price was projected over 1977 to 1985 also according to the IBRD forecast (Ibid.); the projected annual rate of increase is about 4.8 percent. - 75 - 4.41 At current producer prices and world values (adding or deducting transport to and from Afghanistan for imports or exports respectively) the estimated gross values to the farmer and the economy per ha are: wheat: farmers Af 19,200 economy Af 35,000 cotton: farmers Af 30,000 economy Af 65,000 sugar beet: farmers Af 33,000 economy Af 56,000 It is evident that farmers, even with high rates of effective taxation, have a substantial incentive to plant cotton or sugar beet. There are a number of other factors which also influence decisions on how much wheat, cotton or sugar beet should be planted. At present, crop rotations are not very well established in Afghanistan, and indeed in the absence of adequate research it is difficult to advise on optimum cropping patterns for different farming areas. Important factors include optimal use of available irrigation water (winter wheat has low water requirement), control of pests and diseases, weeds, and maintenance of soil fertility. There are very limited opportuni- ties to double crop either sugar beet or cotton with wheat because of over- lapping planting/harvesting times. Crop rotations have to be adapted to the various climatic zones which allow for example double cropping in places with a long growing season such as Jalalabad while only one crop is possible in Bamian which has a frost free season of only 140 days. Seasonal labor requirements and availability of casual labor, as well as the limitations of draft animals and possibilities of hiring tractor-drawn equipment, will also influence farmers' decisions, since wheat needs less than half the labor per ha compared with cotton and sugar beet. Another disincentive for cotton growers particularly in the Spinzar area has been the inefficient arrange- ments for accepting and paying farmers for their seed cotton. 4.42 A valid production strategy would seem to be to concentrate on raising wheat production in the more marginal irrigated land and in areas where cotton and sugar beet are not alternative crops. Miore intensive pro- duction practices in these areas would also optimize utilization of limited irrigation water which would be supplementary to rainfall. On the best lands, shifts to cotton or other crops should not be resisted. They are the way of Afghanistan's agricultural future. 4.43 A strategy for national food security also has to be consistent with the Government's policy to stabilise wheat prices particularly to prevent sharp upward movements in retail prices when crops are poor. FPD must therefore build up stocks through domestic purchases and imports. Early information on likely crop levels is an important component of efficient stock management. To improve crop forecasting, both interseasonal and particularly pre-harvest estimates, systematic collection and analyses of data on the various factors which affect crop output should be undertaken. Such an "early warning system"l/ 1/ FAO reports W/K 4669 to the Government of Afghanistan on the "Develop- ment of an Early Warning System on Basic Food Supplies with Particular Reference to Crop Forecasting." Rome, January 1977. - 76 - would enable the FPD to gear up to purchase surpluses from a good crop or import to build up stocks in advance of a poor crop. The FPD's plans for reserve stocks, imports and distribution would promote public confidence and reduce disruption from price fluctuations. A very tentative indication from the climatic and production records indicate that over a 10-year period four average crops may be expected with three above and three below average. Which- ever crop production strategy is followed, the efficient operation of the FPD will be essential to smooth out year-to-year price and supply fluctuations. (iii) Increasing Agricultural Export Earnings 4.44 Agriculture can make a greater contribution to export earnings in two ways: through raising the quantity and quality of primary exports - cot- ton, meat, karakul, fruits, nuts, vegetables, etc. and by increasing the supply of products with large potential local added value through industrial manufacture and handicrafts. Import substitution, notably through increasing sugar beet production, will similarly benefit the balance of payments. As argued above, raising farmers' incomes and achieving optimal resource use argue for priority for high value export crops - cotton, fruits and vegetables - over self-sufficiency in wheat. Cotton exports can undoubtedly be increased fairly rapidly, say 10 percent annually, to double the export tonnage by the end of the Plan. This will obviously call for a comprehensive program to ensure that essential inputs are available and farmers are encouraged to use them. This expansion also calls for re-equipping ginneries and increasing the country's ginning capacity, with associated development of the oil seeds processing industries. 4.45 There have been increases of about 9 percent per annum in the volume of fresh and dried fruits and nuts exported between 1968/69 and 1975/76. Although the Plan forecasts a continuation of the 9 percent growth rate in exports of all fruits this may prove over optimistic. 1/ A realistic esti- mate, allowing for 2 percent annual increase in per capita domestic consump- tion of fruit, (domestic per capita consumption has remained static for several years while all increases in production have gone to export) indicates there is unlikely to be any increase in availability for export and fruit exports can be expected to level out. The possibilities of upgrading the quality of fruits for export to increase unit value will have to be explored. In contrast, vegetables which have been banned for export for the past five years could well provide a substantial volume if the ban were lifted. Some progress has been made in this regard with the establishment of the Afghan Vegetable Export Corporation which has been given loosely defined export quotas. Further liberalization could be undertaken, in conjunction with taxes on vegetable exports, to prevent disruption of supplies on the local market. 4.46 A modest increase in export earnings from livestock products may be achieved when the Herat abattoir goes on stream towards the end of 1977. This 1/ See World Bank Report No. 1324-AF, op. cit. - 77 - will have the capacity to handle half a million lambs each year. The Plan target of 6,000 tons meat exports per annum, equivalent on average to about 250,000 lambs appears well within the capacity of the Herat abattoir. Only limited increases in exports of other traditional products such as karakul pelts, casings, wool, hides and skins are expected. Local industry and handicrafts will be utilizing more of these products. 4.47 Afghanistan should give particular attention to measures which will raise the quality of agricultural export products notably through better cotton varieties, processing and packaging of fruits and vegetables, and wool scouring. These measures, supported by export grading controls operated by such agencies as the Karakul Institute, Herat abattoir, cotton ginneries, and by the proposed Fruits and Nuts Trade Regulatory Commission and Vegetable Export Corporation, would increase unit value and could result in additional employment in the smaller market towns where such opportunities are very limited at present. D. Policy Measures and Programs (i) Human Resources - The Farmers 4.48 In many respects the most neglected, though by far the most impor- tant, element in the agricultural scene are the farmers. There are probably at least one million full-time farmers most of whom are illiterate. Because of inadequate rural schools, the majority of the next generation of farmers will also be illiterate. Fortunately farming competence is not dependent on a high standard of education, though this should not be regarded as an excuse for not improving rural school facilities as quickly as possible. Farmers need training in improved production practices and this is likely to be most effective when related to specific techniques to promote the main crops. In addition to learning new husbandry practices, an increasing number of farmers must understand the basic principles of farm business management in order to prepare simple farm plans as the basis for obtaining loans from AgBank. Special attention should be given to preparing the next generation of farmers, and practical training courses could be provided for young farmers. These have been successful in many countries. Field days for farmers to visit the research stations might be popularized in Afghanistan. Training of women for more skilled farming operations and increased employment of women may be given impetus if a rural labor shortage results from Afghan workers finding more remunerative employment outside the country. 4.49 Although they are individualistic and suspicious, Afghan farmers have a tradition of cooperating for a common benefit as seen in the repair of irrigation systems, and, in some areas where irrigation water is inadequate to supply all individual farmers' need, land is even farmed cooperatively. Agricultural cooperatives are institutions which could build on this tradi- tion while providing a forum for the new ideas and initiatives which are needed in rural Afghanistan. Following the promulgation in 1974 of the Cooperative Law, the cooperative movement has grown rapidly and by mid-1977 - 78 - there were 102 societies with 9,095 members in 12 provinces. Only two coopera- tive unions have been formed. To motivate and involve farmers in all aspects of policies and measures to improve agriculture, it is desirable that farmers' representatives should be appointed as members of Management Boards and Committees of the various parastatal agencies and development authorities. With the establishment of Cooperative unions these could provide farmer representation. (ii) Farming Structure 4.50 The 1967 Census of Agriculture gives an average size of farm holdings of 3.5 ha. Over 70 percent of holdings are less than this size, while a sub- stantial proportion of the total area is owned by a small number of large land- owners. The larger holdings are either rented to other farmers, sharecropped or farmed with hired labor. As explained in para. 3.48, hired laborers are frequently paid a percentage of the crop instead of cash wages. The previous low cost, ready availability and immobility of rural workers has favored labor intensive systems with payment in kind. This practice is followed even by quite small farmers whose families are of sufficient size to meet all the labor needs of the holding. The size and nature of farm holdings varies widely between different parts of the country. In the Khanabad Irrigation Project the average size of holdings is 5 ha and nearly 80 percent of farms are owner-operated. In the Helmand Valley sharecropping predominates. In the irrigated areas of the provinces of Ghazni and Wardak there appear to be relatively few large land holdings and indeed the small average size of holdings is a widespread problem. For settlement on new irrigation schemes or where irrigated land is redistributed under the land reform program, holdings of 2.0-2.5 ha have been allocated by the Government and these may not be subdivided. 4.51 Current agriculture development projects give emphasis to the plan- ning and financing of viable small intensive farm units. The model units for which detailed farm plans have been prepared are representative of the form of improvement which could be applied to the great majority of holdings to be found in the different regions of Afghanistan. A 2 ha irrigated holding, intensively farmed with well managed irrigation water, good seeds and correct use of chemical fertilizers, can provide a net family annual income of about Af 35,000. This would be derived from a rotation of wheat, cotton, maize and alfalfa/clover, but does not include the value of home-consumed vegetables or milk. Holdings of 2 to 4 ha of irrigable land are rather typical of the old established irrigated systems ranging from the Kabul Valley to Baghlan-Kunduz and Herat, with the high value cotton crop which can be included in the rota- tions in the north and west being substituted by grapes in the Kabul basin. Other farm models include larger holdings with mixed livestock and cash crops. Within this group a 10 ha farm at Herat for example, after development could realize additional net income of Af 142,000 annually from wheat, cotton, and sheep products. 4.52 Important features of farm plans in Afghanistan are that they should be based on optimal use of farm family labor and as far as possible be within the capacity of available animal power. Under the land reform law irrigated - 79 - holdings will be restricted to a maximum size of 20 ha (30 ha if single crop irrigation and 40 ha dry land farming). Holdings above 5 ha of fully irri- gated land will have to use labor additional to the farmer's family. The larger farmers are likely to favor tractors to cope with the extra work of seedbed preparation and planting. Tractors are useful in raising labor productivity in larger farms and coping with peak farm operations particularly if the rural labor supply is inadequate, or if heavy cultivation is needed to break soil pans etc. In the long term interests of Afghanistan's agriculture, however tractors should be treated as supplementary to and not as replacement for animal power on the farm. An important reason for this is the role of forage crops together with the use of animal manure in building up and maintaining soil fertility under conditions of intensive irrigated cropping with high use of chemical fertilizer, cannot be overemphasized. Another obvious reason for favouring the use of oxen is the small size of fields separated by water channels which makes access by tractors very difficult. However, tractor use is subsidized through easy, cheap, credit provided by AgBank for purchase and Afghanistan's relatively low priced fuel. 4.53 Implementing the concept of viable family farm units will require enforcement of the Land Reform Law, together with improvements in land tenure and water rights. It is unfortunate that the Cadastral Survey and Land Regis- tration which are the essential bases for land reform have made poor progress and appear to be discredited in some circles. The procedure now being en- forced for the collection of the graduated land tax requires landowners to register their holdings and is regarded by the Government as complementary to the Cadastral Survey. The reliability of declared size and location of holdings is very questionable however, as a landowner would be reluctant to declare ownership of more than 100 jeribs which would treble his tax assessment and the Government is relying on this provision to secure accurate declarations. 4.54 At the present rate of progress, the Cadastral survey would require about 20 years more to complete. Its existing methods, apart from being slow, leave much to be desired in terms of accuracy. Nor do they conform to any overall system of map control. The problem would be solved by Aerial Survey and production of orthophoto plans. 1/ Orthophoto plans could be produced in much less time than required for a ground survey and at comparable cost. Included in a proposed rural development project for Ghazni-Wardak is a com- ponent for an Aerial Survey of the project area, about 120,000 ha of arable land, at an estimated cost of $250,000. This initial project would have the dual purpose of demonstrating the efficiency of the method and training a nucleus of Afghan staff who could apply the method to complete the cadastral survey of the whole country. (iii) Irrigation and Crop Production 4.55 Attitudes to water in Afghanistan need to be fundamentally changed. It is remarkable that, in a country where human intervention is so essential in water conservation, storage, distribution and utilization, so little con- cern appears to be felt for getting maximum output from every m3 used or, 1/ FAO/World Bank Report 1/77 AFS 11. Annex IX. - 80 - indeed, for knowing exactly how much water is available. A number of studies and surveys of varying quality have been carried out for some of the river systems or parts of them. It is however quite impossible to get a clear overall view of the country's water resources and potential for irrigation development. 4.56 The complete schedule of irrigation projects included in the present Plan relates to a total area of potential irrigation of 888,000 ha. Of this total 90,000 ha have already been developed and during the Plan a further 396,700 ha is proposed to be improved and developed (including 62,000 ha of new land) leaving a carryover of 401,000 ha. However, this is only about one quarter of the estimated total irrigated land. The generally quoted figure fok irrigated cropped land is 2,500,000 ha, with about one quarter fal- low making a total of 3,300,000 ha.1/ If water were available (through more storage, less wastage and more efficient use) the nearly one million ha now fallowed could be irrigated and cropped. Several more million ha of new land are suitable for development and irrigated cropping if water supplies were sufficient. Given the absolute limits imposed by availability of irrigation water, the Plan rightly concentrates on improving water supply and distribu- tion in existing irrigation systems. 4.57 In view of the overriding importance of irrigated agriculture it would be timely to undertake a critical evaluation of the current situation and ongoing projects. It is therefore strongly recommended that a survey should be undertaken which would also produce a national inventory of the irrigation structures, land areas irrigated and current cropping patterns. This would be invaluable for future planning, both for the agricultural sector and for formulating regional development programs. 4.58 To give greater impetus to national water development, responsibility for this activity was separated from the Ministry of Agriculture in 1974 and given to the Water and Power Authority which has since been raised to ministry status. While it appears logical to relieve the Ministry of Agriculture of major engineering tasks it is very questionable whether another ministry should have on-farm responsibility for water use and consideration should be given to returning this function to the Agriculture Ministry. While more appropriate administrative placement will help to provide a better focus on on-farm water use, it is secondary however to the need to train and employ adequate professional staff to carry out this function. 4.59 Reviews of progress in irrigation development indicate a number of problem areas. There are long delays in project implementation and the realization of the full benefits from such large investments. These costly 1/ It is somewhat difficult to reconcile the various estimates of irri- gated land. The Ministry of Agriculture has published a figure of 3,884,000 ha. Another estimate shown in the Asian Development Bank's Sectoral Planning Study of Afghan Agriculture is only 2,584,000 ha. The figure in the text above is consistent with the estimates of yield and output, however. - 81 - delays could be avoided by improved planning and simplified administrative procedures. The need to integrate small scale irrigation works with ongoing or proposed major works, demonstrates the importance of preparing comprehensive river basin water development plans for the major rivers. Progress has been made in this respect for the Hari Rud, Farah Rud and northern rivers and in the current Plan, Canadian assistance will be obtained to prepare a master plan for the Kabul river. Water resources, including groundwater, studies and surveys to prefeasibility, feasibility and master plan stages are expected to be completed during the first three years of the Plan. 4.60 Progress of small scale irrigation improvement has been disappointing for a number of reasons. Unless major works to control river flows are carried out, small scale works, such as the replacement of temporary diversions by per- manent structures, may have little value. A fairly high level of engineering skill is needed to design even small works. Financing such works has presented difficulties because traditional water rights, which allow unlimited water use by upstream farmers, would result in an inequitable distribution of benefits. As a result it is difficult to levy charges to recover cost on an equitable basis. Even more importantly, the system results in inefficient water use as water is practically a free good to those upstream. Obviously a system of water charges has a role to play both in terms of equity and efficiency. A study is currently being undertaken to develop a system of water charges to allow for cost recovery on irrigation projects. 4.61 Considerable interest in groundwater development was stimulated by the droughts of 1970 and 1971 and AgBank's readiness to provide credit for the purchase of pump sets. The main interest was in pumping from shallow wells, as the risks and high operating costs of tubewells make them unattractive for private development. With adequate rain in subsequent years, interest has tended to subside. Future development will require more information on groundwater resources but prima facie it would seem that efficient diesel engines pumping from shallow wells to serve organized groups of small farmers should provide an economic replacement for karezes. 4.62 Operation and maintenance of irrigation projects has been inadequate in the past but this deficiency has been recognized and larger resources have been allocated in the Plan. The Ministry of Water and Power has only 300 professionally qualified Afghan engineers but the country's acute shortage of skilled manpower for irrigation construction and maintenance should be over- come after 4-5 years as increasing numbers are graduated (though these young engineers must be given the opportunity to acquire adequate professional experience before being given primary responsibility). Notable advances in the civil engineering sphere can be seen in the establishment of two indigenous companies (government owned) the Helmand Construction Corporation which has won an Af 317 million contract for the Khanabad Irrigation Project and Water and Power Consultants, Afghanistan. Both companies can provide better condi- tions of employment for Afghan staff than normal civil service employment and can therefore attract well-qualified engineers. 4.63 In the longer term, as water storage and distribution works are com- pleted, the scope for increasing crop output/water input ratios will depend on improving the efficiency of delivery of water to the fields and on improving - 82 - crop-water utilization through better husbandry practices and rotations. Research in these two areas should be initiated without delay by the concerned ministries. As Afghanistan has the good fortune to have huge supplies of lime- stone and coal with which to produce cement this offers the prospect in the long term of lining irrigation distribution systems for delivery at the field. To enable the amount of water supplied to farms to be measured accurately it is proposed that one of the secondary canals of about one m3 should be fully lined with gauges metering water delivered to each farm outlet. Records of the area irrigated, varieties of crops, quantity of water received etc. would provide the essential basic data for establishing minimum and optimal cropwater needs. An important feature of such a pilot metering distribution system is that it could also provide the basis for more equitable water rights with a fair share of water reaching the end of the canal. Autumn sown wheat, clover and a number of vegetables require only about half as much irrigation water as summer crops - cotton, sugarbeet and rice, though where summer irrigation water is adequate, these higher value crops give better economic returns. Cropping patterns and rotations should therefore be developed which will optimize crop output in relation to water availability. (iv) Livestock Production and Pasture Improvement 4.64 The present low productivity of the flocks must be raised if the viability of the nomadic system is to be maintained and improved living stand- ards are to be offered to the many people whose livelihood depends on their sheep and goats. This must involve a more efficient management system which will ensure continuing and effective utilization of the extensive pasture resources. National programs should be mounted to strengthen veterinary diagnostic and clinical services, provide more vaccine for major campaigns, and train professional staff. The Karakul Institute is functioning effec- tively in regulating and improving export marketing of pelts, though there may be scope for the Institute and the Ministry of Agriculture to collaborate more actively in breed improvement programs. Nomadic flocks are particularly vulnerable to unfavourable weather which causes marked cycles in sheep produc- tion. In good years when feed supply is relatively high, flock numbers build up until nutrition is inadequate and/or summer water availability becomes a limitation causing reduced lambing and higher mortality. 4.65 The nomadic pastoral system suffers from three major constraints, though to a lesser degree they affect sedentary flocks as well. First and foremost shortage of feed throughout the year, but particularly in winter, limits the productivity of nomadic and semi-nomadic sheep and goats which have to rely mainly on the estimated 40 million ha of rangeland. Secondly, diseases considerably reduce productivity, and mortality rates are high, especially among young animals. Veterinary services are inadequate or non- existent in spite of UNDP/FAO and Russian technical assistance to establish clinical and diagnostic facilities and vaccine production. The third problem area is the livestock marketing system which is poorly developed with most animals being purchased and trekked to consumption centers through a chain of dealers and butchers. Supply of animals to main markets is very seasonal with peaks in late spring and late autumn and troughs in late winter and summer. Market prices fluctuate accordingly. No premium is paid for quality meat - 83 - though the fat tail or fat rump commands a premium over mutton in Afghanistan. It should be noted however that for the past few years, with flockowners building up numbers after the drought and therefore reducing the availability for slaughter and with the high prices ruling in neighboring Iran for fresh mutton, there has been a fairly active market for meat. Retail prices for meat in Kabul have almost doubled while cereal prices have been almost stationary. 4.66 What may well prove to be the pilot stage in a national program for livestock development and pasture improvement is the establishment of the Herat Livestock Development Company (HLDC). HLDC was set up in 1973 with responsibility for: (a) On-farm development of about 1,200 farms to improve irrigation from groundwater, obtain breeding stock and produce alfalfa. (b) Design and construction of a modern slaughterhouse with daily capacity of 3,000 head of sheep at full operation. (c) Establishment of an Experimental Range Improvement Center. (d) Provision of extension services to farmers, range research and management of the slaughterhouse. The immediate objective was to provide an export market for flock owners in the Herat area via a new slaughterhouse and export of chilled mutton. Longer term and more fundamental objectives were to establish an agency and system for improving mixed farming husbandry systems and develop practical techniques for range management. 4.67 In the future it is proposed to extend HLDC's responsibilities to cover pastoral livestock development over the whole of Herat, Badghis and Farah provinces and the western two thirds of Ghor province. In this area of some 100,000 km2 there are about 144,000 families - a million persons with 2 million sheep and goats. Extension of HLDC's operations will include: (a) Establishment of about 14 Sheep Improvement Centres; 7 each in winter and summer grazing areas, which would serve as bases for the provision of field services to livestock owners. (b) Provision of effective animal health services for all sheep and goats in the area. (c) On-farm development (with loans from AgBank) for 50 individual farmers with holdings of around 10 ha each, 50 cooperative groups of 14 small farmers having holdings of about 3 ha each and settlement of about 25 nomadic groups of about 12 families each. - 84 - (d) Expansion of the Experimental Range Improvement Center by establishing field stations in the highland summer grazing area and in the wintering area. HLDC will also set up a unit to construct wells and farm access roads. 4.68 Good progress has been made in establishing HLDC as the chosen instrument for implementing development in this important area. By March 1977 credit had been provided to 569 livestock owners including 275 long term loans for Af 19.88 million. Good contacts have been established with flock owners through extension work and surveys. The slaughterhouse has been completed and was ready for operation in late 1977. When the second phase of HLDC's program is fully operational, and initial experience has been gained in slaughter and export of chilled mutton an indepth evaluation of this program should be under- taken. Particular attention should be given to technical aspects relating to raising productivity of winter and summer ranges, i.e. the work of the Experi- mental Range Improvement Center. Based on the results of this review it would be possible to formulate the next phase of the program which could include the progressive development of a complete range management system within HLDC's project area and the extension of the program both to the Helmand Valley in the south and to the northern provinces. 4.69 The cattle population of Afghanistan, estimated at 3.6 million head (including about 1 million each of work oxen and cows), represents a valuable asset and its potential may not be fully appreciated. Cattle are maintained in close association with irrigated farming. They provide the major source of draft power and dairy products for villages, while their dung is used for manuring fields or for fuel where woqd is scarce. Productivity of the indi- genous breeds is low due to inadequate nutrition. The national average for milk lactations is only 400-450 kg, though yields in the Baghlan area where farmers supply a Swiss-managed dairy plant, are reported to be 1,200-1,500 kg. Oxen, which are relatively well fed for the heavy cultivation season, work well. Exotic breeds, mainly Brown Swiss and Holstein have been introduced and have adapted satisfactorily. The pilot dairy development undertaken in the Baghlan area with Swiss technical assistance has shown there are good prospects for establishing commercial milk production by small farmers for collection to supply town dairy plants. This could certainly contribute a useful additional income to small farmers and could fit very well in integrated rural develop- ment programmes such as is proposed for Ghazni-Wardak where small farmers would be assisted to own a few cows and their milk would be collected by a dairy plant in Kabul. 1/ 1/ An FAO mission under the International Scheme for Coordination of Dairy Development has prepared a plan for developing the Kabul dairy plant and the expansion of milk production to supply it. - 85 - 4.70 As in many developing countries, the growth of towns and rising urban incomes is causing a keen demand for poultry meat. Earlier attempts to establish large scale commercial broiler and layer poultry units in the Kabul area have not been very successful due in part to the absence of an organized supply of balanced poultry feed. Currently another attempt at a large poultry project is being made through setting up a state enterprise with Bulgarian assistance. When this undertaking is established consideration could be given to expanding production through associated village farmers or cooperatives. 4.71 To support both the poultry and dairy development programmes a com- mercial animal feed industry needs to be established which would utilize the considerable quantities of feed raw materials from the oil seed, sugar and cereal milling factories. Studies for establishing an animal feed industry have indicated the feasibility of setting up a feed plant at Baghlan.l/ This plant would utilize local raw materials including dried beet pulp, molasses and cotton meal. The initial volume of production, which would be limited by the availability of beet pulp and molasses, would be about 20,000 tons though this could be doubled when the new sugar factory reaches full capacity. (v) Incentives and Investment 4.72 Afghan farmers have demonstrated their responsiveness to changes in relative prices of different crops. The rise in the producer price of cotton from Af 12.6/kg in 1973/74 to Af 15/kg in 1974/75, has led to a 50 percent increase in output. Compared with the present official support price for wheat of Af 6.5/kg, cotton production is clearly more attractive. A sound pricing policy will have to ensure that cotton and sugar beet are the most attractive crops in areas convenient to processing facilities; but at the same time the price for wheat must be kept high enough to encourage farmers to use inputs. As a basis for sound pricing policies it is essential that systematic cost of production surveys covering the major crops should be undertaken each year. 4.73 Investment in agriculture over the past three decades (and for centu- ries previously) has meant irrigation. Traditional irrigation works were highly labor intensive both in the original construction and their subsequent maintenance. These works were designed to provide immediate benefit (however inefficient in water use) through permitting land to be farmed. They were carried out within the current resources of the people who would benefit and involved no external investment or debt. More recent irrigation schemes have involved large amounts of external finance, complicated engineering works and long intervals before realizing full benefits. A comparison of these two models of irrigation development suggests that priority should be given to 1/ (i) Report on the Proposed Feed Mill at Baghlan by U.K. ODA. 1973 (ii) Provisional Report on the Feasibility of an Animal Feed Industry in the Region of Baghlan, by Swiss technical Cooperation 1977. - 86 - irrigation works which will provide quicker returns - improvements to existing water distribution systems and smaller works. At the same time, farmers should make greater contributions to these programs (as they did in earlier times). This could take the form of a capital charge on land in the case of improvement to an existing system (to be liquidated over a period of years), or rent to be paid by new settlers on irrigated land. In smaller projects farmers could contribute by providing labor, local construction materials, and local animal transport. In all types of development, farmers should undertake land devel- opment, clearing, levelling, terracing, and field water distribution. In the farm models developed in projects for World Bank assistance it is clear that sufficient savings would be generated to allow farmers to meet operation and maintenance costs and even repay irrigation investment costs,within a fairly short time span. 4.74 The Plan proposes to invest Af 32 billion in irrigation which will allow 396,000 ha to be developed including 62,000 ha of new land . The balance consists of improving existing irrigation schemes. This amounts to about $1,600 per ha but covers only the cost of providing reasonably effective irrigation systems. In future, further phases of improvement will be required particularly in realignment, and perhaps lining, of distribution systems and rationalisation of fields and farm holdings. Projecting forward to the end of the century, if the same rate of irrigation as envisaged in the Plan is main- tained, a further I million ha of irrigated land would be improved at a cost of $1.6 billion (in 1976/77 prices). This would be a rate of 2 percent of total irrigated land annually. By the year 2000 half of the irrigated land would still be unimproved. 4.75 Investment requirements for livestock and pasture improvement are far more difficult to estimate. One can generalize from HLDC's program to provide bases for nomadic groups of 12 families at an investment cost of $42,000 each. Assuming each unit contains an average of 1,400 head of sheep, about 120,000 nomadic families, if settled in 10,000 groups, would require an investment of $426 million. In addition substantial investment will be required to improve rangelands through stock watering points, grazing manage- ment and improvement of pastures. The next phase of the HLDC project will require a vastly increased rate of development and investment to achieve any real impact in modernizing the nomadic system. 4.76 Off-farm investment is required for the progressive improvement of infrastructure to support farm development. Construction and improvement of farm-to-market roads deserve high priority, though the Plan makes little provision for these minor roads improvements. Primary marketing facilities and storage for produce, notably reserve stocks of wheat, will also call for large investments to provide inter alia for more efficient and hygienic facil- ities for food products marketing including wholesale and retail markets and shops. Agricultural processing industries are given a budget of Af 13.8 billion. This figure includes major investments in expanding urea production by 300,000 tons and cotton ginning capacity by 175,000 tons, as well as flour mills, abattoirs, sugar beet factories, and fruit processing plants. - 87 - (vi) Institutions and Services 4.77 Coordination and management of the activities of all the Government institutions and services which are concerned with agriculture is the primary responsibility of the Ministry of Agriculture. There are however some notable exceptions including on-farm irrigation development (WAPM) and the agricultural activities of HAVA and RDD. The Ministry has a conventional structure, with headquarters departments representing the different subsectors and corresponding departments in the provinces. Having shed responsibility for supplying inputs to farmers to AgBank, AFC and ASC, the Ministry is in a position to concentrate on its major functions of policy making and planning, extension, agricultural research and the provision of national plant protection and veterinary services. 4.78 Some strengthening and reorientation of agricultural planning is needed. At all stages of programming and project analysis from initial con- ception through to feasibility studies and implementation the Ministry of Agriculture's technical departments should play a much bigger role. The role of the Ministry's Planning Department should be primarily that of coordinating multidisciplinary projects and providing the specialist economic participation. To improve the Ministry's overall competence to elaborate policy measures and formulate projects, the Planning Department should undertake an annual sample survey of the sector and cost of production studies. These surveys can be designed now, and methodology tested for implementation immediately following the 1978 national population census and the 1980 census of agriculture. 4.79 The progressive strengthening of the Ministry of Agriculture's field staff is needed. It is essential to upgrade the technical and practical compe- tence of agricultural extension staff and particularly the extension super- visors who must be capable of advising farmers on efficient farm planning and management. There should be regular inspection visits by senior officials and specialists to the provincial directorates and research stations. There is clearly room for more effective inter-departmental coordination in provincial agricultural offices particularly through closer liaison between extension staff and research stations. A review of the whole agricultural education and training system and facilities should be undertaken.l/ In undertaking this review the focus should be on the ultimate objective of upgrading technical skills and management at the farm level and including the need to provide facilities for training farmers and even more importantly, for training their sons. 4.80 Agricultural Research is the weakest link in the chain of institu- tions and services and top priority should be given to providing adequate staff and facilities for research. Primary responsibility for research lies in the Ministry of Agriculture which has 10 regional stations employing about 120 professional staff. Until the function was partly taken over by ASC much of the research stations' effort and land was devoted to raising foundation 1/ A national extension study will be carried out as part of the second phase of the Khanabad irrigation project which will cover part of this proposal. - 88 - seed and root tree stocks. Research programs have concentrated on selection of higher yielding varieties, response to fertilizers, effectiveness of chem- ical treatments (insecticides and pesticides), seeding rates, and planting dates. Initially research was directed at raising yields of irrigated wheat, though recently more attention has been paid to cotton (notably with French assistance), rice, maize, sunflower, sugar beet and vegetables. Al- though there is now a competent cadre of keen, well trained, professional research workers, due to critical shortages of budget and equipment, lack of overall direction, insufficient continuity of specific programs and the high turnover and transfer of key staff, achievements have been very disappointing. 4.81 This situation cannot be allowed to persist. New impetus and a higher stat,us for agricultural research might be achieved if the proposal to establish a National Agricultural Research Institute is implemented. While specific research programs e.g. for cotton varieties, dry land wheat etc. should be continued, coordination and direction on a national basis rather than by commodity institutes is essential to promote effective farming systems and rotations. Major long-term programs should be assigned to 2 or 3 selected research stations while short-term crop improvement programs should be de- signed for each research station for those crops which are important in the area they cover. In addition to specific crop research programs, a major effort should be directed to research on all aspects of crop-soil-water rela- tionships in order to identify practices which will achieve maximum water use efficiency. Crop rotations should also be studied in the long-term research programs, as already a serious problem of weed control has appeared, which might be tackled most effectively through a rotation which includes legume forage crops. A thorough appraisal of Afghanistan's research needs, and the formulation of a program to meet them, is a matter of urgency. 4.82 The faculty of Agriculture of Kabul University also undertakes limited agricultural research. Although the faculty's facilities are very limited, its highly qualified staff could certainly be used part time to support programs at the research stations. 4.83 Plant protection resources have rightly given priority to combat- ting locust attacks. About 3.5 million jeribs of land in the north, north- west, and central areas will be brought under protective measures for locust control, during the Plan period. Effective chemical control of fruit pests has also been introduced and the service should be built up progressively. A diagnostic laboratory for this purpose is envisaged with UNDP finance. Veterinary services have given priority to vaccine production and campaigns to control major animal diseases. Some success can be claimed in the non- appearance of rinderpest for the past three years. Efforts are underway to establish regional diagnostic centers and laboratories. Central clinics are planned to increase from 17 in 1975 to 27 in 1983, while vaccine production is planned to treble during the same period. A crucial constraint is the shortage of professionally qualified Afghan veterinarians for posting to the regional animal health centers, provincial services, and HLDC. Currently, Afghanistan has less than 500 veterinary technicians and only a few of them have anything more than rudimentary technical skills. The problem will be solved if an adequate number of high caliber entrants come forward to attend the five-year courses in Animal Production and Health in the Animal Science - 89 - Faculty at Kabul University. At present there are only 29 students attending the 4th year of these courses though, with 315 in 1st, 2nd and 3rd years, the Plan target of 100 entrants a year is being achieved. Sound practical post- graduate experience of animal disease problems in Afghanistan will be provided in the regional centers and with HLDC. 4.84 Good progress has been made to equip Afghanistan with institutions capable of delivering to farmers the main inputs needed to intensify irri- gated cropping and expand output. The Agricultural Development Bank (AgBank) was established in 1965 and is entirely state owned. In the interim it has been transformed into an effective agricultural credit agency which now provides loans to about 60,000 farmers. In 1976 it provided a total of Af 1.13 billion made up of Af 723 million short-term and Af 407 million medium/ long-term loans, though this amounts to less than 5 percent of the value of marketed farm produce. Since the major part of the short-term credit (Af 510 million) was for financing fertilizers, it is clear that AgBank has an essen- tial role in promoting fertilizer use. A rather high proportion of short-term loans are outstanding; about one-third of fertilizer loans were overdue in 1976. This appears to be a legacy of earlier attitudes of farmers to repay- ment of government loans and is being corrected by firm action to instill better credit discipline in the borrowers. Repayment of medium and longer term loans is more satisfactory, because loans are based on more detailed farm plans and closer contacts are maintained between borrowers and AgBank staff. 4.85 With 13 main branches and 5 subsidiary branches in the provinces, AgBank plans to expand its coverage by establishing two additional main branches annually. Special responsibilities of AgBank include promoting agricultural cooperatives of which 60 primary societies have received loans. These are charged a 1 percent lower interest rate, security requirements are easier and the societies earn the retail distribution margin on the fertil- izers which they handle. Apart from cooperatives, AgBank assists small farmers by accepting group security where individuals would be ineligible. Under the Land Reform program AgBank collects payments for land allocated to new owners, for payment to those dispossessed. It also has a role in provid- ing credit for farmers in new settlement schemes. AgBank had demonstrated its capacity to contribute significantly to Afghanistan's agricultural development. 4.86 Import and servicing of tractors and farm equipment has been made a special responsibility of AgBank and is being handled by a subsidiary company which will import about 300 tractors annually. Two possible dangers in AgBank's domination of farm mechanization which must be recorded are first some tendency to excessive zeal to replace animal power with high cost mechanical power, and second the pressure to build a large and costly national tractor workshop bureaucracy which would substitute the private workshops which are appearing spontaneously at present. 4.87 The Afghan Fertilizer Corporation (AFC), which is government owned, was set up in 1972 as an independent state-owned agency for the procurement and distribution of chemical fertilizers, pesticides and veterinary medicines. AFC is rapidly establishing storage depots in the provinces, and distributes to farmers through a network of 500 contracted retailers. Increasing effort - 90 - will be needed to expand fertilizer use to smaller more remote and less innovative farmers, which will call for closer collaboration than hitherto between AFC and the extension service. 4.88 The Afghan Seed Company (ASC), also wholly government owned, has been given a monopoly of the supply of seeds and planting material, including imports if necessary. The company has taken over 6,500 ha of irrigable land and will be primarily concerned with production of improved cotton and wheat seed, with the objective of supplying all cotton seed requirements of 6,000 tons annually and 20,000 tons of wheat seed annually. To enable ASC to undertake this task effectively, extra resources will have to be applied to breeding, importing and testing improved varieties at the research stations before approving for multiplication and distribution. A very practical arrangement has been made with AFC through which the fertilizer retailers will also deliver seed to farmers. An important feature of ASC's operations will be the employment of contract growers for the multiplication of certified improved seeds. 4.89 Marketing of agricultural produce is handled on a commodity basis by a variety of agencies, both public sector (sugar beet and seed cotton) and private traders (most of the cereals, livestock, fruits and vegetables). In general farmers are in a weak selling position and the most promising long term improvement lies in the formation of cooperative societies. Comprehen- sive recommendations for improving fruit and vegetable marketing for export have recently been approved by the Government. HLDC's operations will estab- lish a system for marketing quality lambs for export. For cotton, the need to improve arrangements for delivery and payment by ginneries has been recognized and additional buying centres with more storage are to be built. The forma- tion of cotton producers cooperatives which would coordinate deliveries to the buying centres should also be encouraged. 4.90 The Food Procurement Department (FPD) of the Ministry of Finance has the responsibility for wheat procurement, storage and distribution in order to stabilize producers' prices and ensure adequate supplies for domestic consumption. FPD has the specific function of providing wheat flour and other necessities at subsidized prices to government employees and various public institutions. It has storage facilities throughout the country with a total capacity of about 290,000 tons. Over the period 1964/65 to 1975/76 FPD's annual average purchase of domestic wheat was 23,000 tons while imports averaged 85,000 tons (see Volume II Table 7.12). Average total quantity of domestic wheat marketed annually is estimated at about 700,000 tons which is handled by a well established system of numerous grain dealers. An effective program to ensure adequate wheat supplies and payment to farmers of the sup- port price in good crop years will require considerable strengthening of FPD's operational capabilities and probably additional storage. Consideration should be given to the employment of licenced grain buyers and use might be made of AFC's retail distribution agents. Alternatively consideration could be given to establishing a new wheat marketing organization which would take - 91 - over responsibilities for wheat procurement, storage and distribution from FPD. 1/ (vii) Conclusions 4.91 The conclusions of this review of the prospects for realizing the potential for agricultural development provide cause for optimism. In spite of all the disabilities of climate, terrain, geography, and the inadequacy of physical and social infrastructure, Afghanistan possesses adequate agricul- tural resources to feed and clothe its people and provide growing export earnings. Perhaps the most important factor is the quality of the farming population - patient and hardworking. Relatively rapid modernization of agriculture is, in fact, proceeding as fast as attitudes and skills can be adjusted. However, it must be accepted that weather will, during the fore- seeable future, dominate performance from season to season. The expansion and improved efficiency of irrigation will mitigate the effects of drought on crop production, but pastoral systems will forever be very vulnerable. The First Seven-Year Plan is soundly conceived in establishing growth targets for agri- culture which are consistent with national priorities and in providing the range of farm inputs which are needed for these increases in production. As is inevitable in any long-term national plan, modifications in output objec- tives are likely. The Plan is over-optimistic about the speed of implementa- tion of projects, in particular the large water and irrigation schemes. Good progress in construction of the Khanabad irrigation project, HLDC abattoir and HAVA ginnery are encouraging signs that the system can be geared up for more speedy implementation. 4.92 It is possible to feel some confidence that by the end of the Plan, the foundations will have been laid for sustained agricultural progress. Although the Plan target of 4.65 percent annual growth in agriculture's con- tribution to NDP may be over-optimistic, there are other indicators of progress towards achieving a sound rural economy based on viable family farms. 180,000 farmers will be clients of AgBank by 1982/83. This could provide the founda- tion for what might be the main agricultural objective of the Second Seven-Year Plan, to bring half of the nation's 1.2 million farmers into the market economy. 4.93 The major policy objectives of national food security through a wheat production and price stabilisation programme, increase in export earn- ings, and rural development, require more precise definition of objectives and implementation schedules. This will shortly be completed in respect of wheat production and stabilisation with technical assistance from the US and the UK respectively. Further consideration should be given to the very attractive prospects for cotton exports which indicate that a special campaign should be mounted to encourage a faster rate of growth of production. The Rural Devel- opment Program is well conceived and the real need here is to provide more 1/ A study of wheat marketing, price stabilization and food security reserve stocks is being undertaken with technical assistance from the UK. - 92 - resources. Specific recommendations have been made to strengthen the devel- opment programs in a number of important areas. (i) The importance of improving the technical skills and raising the status of farmers through farmer training courses, better extension advice, participation of farmers in policy making through membership of Manage- ment boards of the various government agencies engaged in agriculture. (ii) A review of agricultural training should be undertaken with particular attention to providing effective training at the farmer level. (iii) Increased support should be given to promoting agricultural cooperatives. (iv) The whole strategy for development should be based on creating viable family farm units to promote progressive intensification of husbandry practices. (v) A national survey of the irrigation systems, current situa- tion and development programs, should be undertaken. (vi) An indepth review of HLDC should be undertaken after phase 2 becomes fully operational, to prepare for further development which may be expected to provide a national program for pastoral improvement. (vii) A review of agricultural research needs, elaboration of research programs and assessment of the organisation and resources needed, should be carried out. (viii) An animal feed industry should be established at Baghlan as the basis for modern poultry and milk production. (ix) The Ministry of Agriculture's capability to undertake economic and marketing surveys should be strengthened. (x) An Agricultural Sample Census should be undertaken following the 1978 Population Census. E. Agriculture and Rural Development 4.94 So far, this chapter has primarily been devoted to identifying the constraints to increasing agricultural production and the means to address them, without fully clarifying the broader role of agriculture in Afghanistan's development. The objective of meeting the basic needs of the population requires focussing a large share of the development effort on rural areas where the majority of the needy population lives. It was argued in Chapter III that basic needs could most efficiently be met through a strategy that - 93 - combined reliance on the market with suitable public programs in education and health. The key to success of this approach in rural areas is raising agricul- tural production. 4.95 However, the solution is not that straightforward. Agricultural resources and hence income are not distributed according to needs; neither within nor between regions. The areas with the best land, assured supplies of water, and access to markets are naturally the more prosperous. In these provinces, like Kunduz, Baghlan and Helmand, people in general are more pros- perous than they are in the more inaccessible and poorly endowed provinces like Badghis and Ghor, or overpopulated ones like Nangarhar (see Ch. III, Table 15). The primary needs in these poorer areas are for rural development programs designed to develop infrastructure and equalize development benefits, and effective progressive income taxation. But regardless of the province, the skewed distribution of landholdings is a critical problem. Inevitably, the neediest are those with the least land. Yet measures designed to increase aggregate agricultural production will primarily benefit those who own land, with benefits to the poorest trickling down in the form of increased employ- ment, and possibly lower food prices. While this will most certainly result in improvement of the absolute incomes of the poor, its impact may be slow and uneven, and it is probable that a deterioration in the distribution of income will result. In the medium-term, relatively little of the increased agricul- tural income is likely to go into effective purchasing power of those whose basic needs are not being met at present. 4.96 A second set of concerns relates to the functioning of the market. They are often not made explicit in reviewing a country's growth strategy, but it is as well to delineate them at this early stage in the evolution of Afghanistan's productive structure. Rising incomes from increased agricul- tural output, concentrated in the hands of the larger farmers, result in a pattern of consumption favoring goods with high income elasticities of demand. These are often luxury or semi-luxury items, either imported or produced with relatively capital-intensive technologies. The result is often the emergence of powerful interest groups of traders and manufacturers whose prosperity depends in part on the persistence of income inequalities. From this point, the sequence has often been that the country runs chronic balance of payments deficits and the terms of trade shifts against the agricultural sector. This is an over-simplification of a very complex process, but aspects of it are discernible in many of the South Asian countries for example. Effective income redistribution and an efficient progressive tax system can help the market to operate to Afghanistan's long-term advantage. 4.97 Clearly then, increased agricultural production is only part of the solution to meeting basic needs. Growth must be accompanied by income and asset redistribution in the agricultural sector. This can be pursued in several. ways: (i) changing systems of agricultural production through land reform, and improved land tenure arrangements; - 94 - (ii) the assessment of progressive taxes on agricultural produc- tion; (iii) rural development programs designed to develop rural infrastruc- ture in those areas with high agricultural potential that has yet to be effectively exploited, and integrated rural develop- ment schemes designed to improve the lives of inhabitants of poor provinces that lack the potential for sustained agriculturally-based development; and (iv) the promotion of agricultural cooperatives as a means of providing small farms with access to credit, modern agricul- tural technology, and marketing facilities. (i) Land Reform and Land Tenure 4.98 Recognizing that the skewed distribution of land ownership is a fundamental social and economic problem, the Government of Afghanistan introduced a Land Reform Law in 1975. Under the law, individual holdings are limited to a maximum of: (a) 20 ha irrigated land double cropped or in orchards, or (b) 30 ha irrigated land single cropped, or (c) 40 ha dry-farmed land. The ultimate impact of this law is difficult to predict. Information on land- holdings is unreliable, and the law itself is undergoing continuous (although minor) modification. As it currently stands, its principal effect may not so much be one of redistributing land to the landless as redistributing land among current owners so as to create more viable mid-sized farms. There are several reasons for this. The vast majority of the farmers own less than 20 ha of irrigated land - according to the 1967 survey only some 2.2 percent of the landholders own more.1/ These farmers do, however, own about 42 percent of the cultivable land. This is not, however, equivalent to the land avail- able for redistribution. First, all single cropped irrigated holdings up to 30 ha, and dry-farmed holdings up to 40 ha would be exempted. In practice the majority of the larger holdings fall into these categories. Second, the law also gives farmers two years in which to either sell the land or distribute it among eligible family members (males 18 years of age and above) who will actively farm it themselves. This is significant because many large landhold- ings in Afghanistan are titled in the name of an ancestor of the present farmers. These farmers currently farm the land as one unit and live as an extended family, but would break the land up among themselves and title it 1/ The average holding in this survey was estimated to be about 3.5 ha, however, partial results based on the incomplete cadastral survey suggest an average farm size significantly lower - 1.8 ha. - 95 - in their own names to keep the land within the family. Third, much techni- cally arable land is owned, but cannot be farmed because of inadequate water. Together, these three factors will significantly reduce the amount of cultiv- able land available for redistribution. If all land in 20-100 ha range were redistributed through private action, Chapter III, Table 17 suggests only about 8 percent of the arable land would ultimately remain available for redistribution. 4.99 To prevent the potential proliferation of small uneconomic holdings, the program will concentrate on creating viable farm units of at least 10 jeribs (2 ha). Highest priority for redistributable land will consequently be given to farmers on adjacent farms who currently own less than this amount. Following that, priority will be given to sharecroppers who farmed the land subject to redistribution, landless nomads, agricultural laborers, and gradu- ates of agricultural schools, in that order. State land is also being redistributed through settlement schemes with holdings limited to 10 jeribs (2 ha) of irrigated land. Nomads have priority for this land, followed by sharecroppers and landless laborers. 4.100 The amount of land that will ultimately be redistributed to the poor is very uncertain. The adequacy or inadequacy of the Land Reform Law in this respect will only emerge in the course of implementation. Preliminary indications are that this amount will be small, and that much of it is likely to be of the poorest quality with little or no water, and subject to unpredict- able rainfall.l/ Under these circumstances one might ask whether the land ceilings have been set too high. Twenty hectares of double-cropped irrigated land is a large holding in Afghanistan and insures the owner an income many times the national average. The answer to this must ultimately come from an evaluation of the pilot phase of the program, to determine whether the half- million or more landless poor the program aims to help are actually benefit- ting. 2/ 4.101 As important as the skewed distribution of land is to development in Afghanistan, comprehensive land reform must also tackle two major related obstacles - tenancy arrangements and the fragmentation of land holdings. Al- though sharecropping in its many forms is widespread in Afghanistan, little accurate information on its extent exists.3/ In the 12-village survey cited in para. 3.43, sharecroppers comprised between 2.3 percent of total agricul- tural households in one village and 36.4 percent in another. However, vil- lages exist where all the cultivable land belongs to one man who gives it out for sharecropping. Renting is not a common practice in Afghanistan - the 1/ It is also felt that in some areas the domination of the landlords is still so complete that the landless would be fearful of accepting their land. 2/ Smith, et al., op. cit., p. xxxvii. 3/ For a description of sharecropping arrangements, see para. 3.45. - 96 - above survey showed less than 3 percent of the households renting land in every case. 4.102 Sharecropping is a well established practice in Afghanistan. It serves to provide both tenant and landlord with a measure of insurance against the vagaries of weather. It does, however, have the major drawback of dis- couraging both from investing in land improvement and modern agricultural tech- nologies. As such it constitutes a major barrier to agricultural moderniza- tion. The current land reform program contains little to ensure the practice will decline - only that recipients of redistributed land must personally farm their holdings. Additional measures must be taken to modernize traditional sharecropping arrangements. These measures could initially include getting sharecroppers and landlords to split production costs on the same basis as they split yields. This would help particularly in increasing the use of annual investments like fertilizer. To encourage longer term investment, some form of landlord-sharecropper contract could be instituted which would guarantee a sharecropper's right to farm the land for, say, ten years. With such security of tenure, sharecroppers would be much more willing to help invest in land improvements. Ultimately though, tenure arrangements will have to shift to an economically more efficient rental basis. This could be incorporated in the land reform pilot study suggested above. The transforma- tion is a remarkably simple one - landlords should be told to insist upon a fixed payment that could equal his average share of the past few years, for instance. Payment could still be in kind. 4.103 Land fragmentation is a strong disincentive to land improvement, as the capital costs associated with, for instance, one contiguous hectare are usually considerably lower than those associated with the same amount of land spread over several non-adjacent plots. It is a major problem in Afghanistan as Islamic law dictates that all immediate relatives receive a share of an estate. The consequence of this practice over the centuries is family holdings spread over numerous plots of extremely small average size. 1/ Consolidation of such fragmented holdings into unified plots is essential for efficient modernization of agriculture and should be an integral part of the overall land reform program. Hence, as land ownership is ascertained for pur- poses of taxation and redistribution, measures could be taken simultaneously 4.104 Land reform is of critical importance to Afghanistan's future, and the Government has shown an impressive willingness to face the issue squarely. The problems, however, are immense. First there is the lack of an adequate base of information on land ownership. Second there is the sheer size of the administrative effort which is required. Third there is the power and influ- ence of the large landowners. All this probably means that land reform will be partial and long drawn-out. The uncertainty which land owners who are close to the ceiling may feel, will undoubtedly reduce their willingness to 1/ The mission was quoted a case by the Cadastral Survey Organization of a square kilometer in Paktia province in the east being subdivided into about 4,000 plots. Average plot size was about 0.025 ha. - 97 - invest and innovate. Yet there is little alternative if the basic objective is to be maintained. In the circumstances perhaps the best approach would be to concentrate initially on land redistribution in those areas of the country where ownership is generally known to be more unequal. This, com- bined with action on converting sharecropping to fixed rentals and land consolidation, would have the maximum economic and social impact within a reasonable time-frame of say, 10 years. In the longer run, the land reform could gradually be extended to other parts of the country. (ii) Agricultural Taxation 4.105 As there is little else to tax in Afghanistan and because it consti- tutes about half of GDP, agriculture must directly or indirectly provide a large share of public revenues. Clearly only that part of farm production which is marketed can provide farmers with cash incomes, part of which may be extracted by income tax, the progressive land tax, export taxes, low producer prices for items sold to a state monopoly, e.g. sugar and cotton, import duties, and by charging above cost for farm inputs. A rough estimate of the farmgate value of marketed produce in 1975 is Af 25 billion with identifiable "taxation" contributions estimated at Af 3 billion or about 12 percent of farmers gross sales.1/ This may well be higher than the taxation of marketed output in other sectors. Given the low tax levels in all sectors, however, it is apparent that agriculture must play a role in any comprehensive fiscal strategy (see para. 11.57 for futher discussion of this issue). 4.106 The progressive taxation of agriculture will also serve important redistributive purposes. Higher taxation of the more prosperous farmers would serve to lessen the disparities in income and reduce the distortion of produc- tion and trade away from meeting basic needs. Effective taxation on an inter- regional basis could also serve as the basis for redistribution from the more to the less prosperous regions in the form of increased rural services in the latter areas via rural development programs. 4.107 Until recently, the only real form of agricultural taxation has been government pricing policy. The prices farmers receive for agricultural pro- duce are significantly lower than the domestic equivalent of the international price which the Government either receives (e.g. cotton) or saves (e.g. sugar, wheat). However, in 1975, in conjunction with the Land Reform Law, the Gov- ernment passed the Graduated Land Tax law which will significantly increase the agricultural tax share. The Government has found it more difficult to implement than anticipated though; in 1976-77 only Af 160 million of the budgeted AL 450 million were collected, accounting for about 1.3 percent of total revenue. It is a progressive tax graduated according to the quality of the land and the size of farms. Farms below 5 jeribs (1 ha) are tax-exempt and farms between 1 and 2 ha receive at least a 40 percent exemption. As the majority of the farms are less than 4 ha, and hence pay a maximum of Af 1,050 each, the potential for land tax revenue appears limited, perhaps to less than 1/ Details of this calculation are given in Volume II, Table 5.8. - 98 - Af 1 billion. Cooperative membership will be encouraged by granting deductions of 10-20 percent (depending on the size of the holding) to members. Land is graded into seven categories (four classes of irrigated land, three classes of dry-farmed land). Tax is assessed on the basis of productivity relative to Grade I, which is fully irrigated, double cropped, and has convenient access to markets. The tax schedule for Grade I land is given below. Grade VII land pays only 10 percent of the Grade I rate. Table 20: LAND TAX SCHEDULE - GRADE I LAND Size Average Net Land Maximum of holdings Revenue/holding tax/jerib tax/holding --jeribs--- Af Af Af 1-10 15,000 45 450 11-20 30,000 60 1,050 21-50 75,000 85 3,600 51-100 150,000 120 9,600 101-200 300,000 175 27,100 201-500 750,000 235 97,600 Oe01-1,000) 1,500,000 300 255,100 4.108 The proper taxation and redistribution of agricultural land is highly dependent upon accurate records of land ownership. However, no such records exist in Afghanistan. Records, insofar as they exist, are extremely out-of-date. As an interim measure, taxes are being assessed on the basis of farmer declarations being collected currently by the Ministry of Agriculture. Some degree of honesty is exacted from farmers by explaining that declarations play an important role in determining legal ownership of disputed land when the new official land register is produced. However, in the longer run a proper cadastral survey is needed. Units of land measurement and quality of land vary greatly from province to province. A fair and effective system of agricultural land taxation must be based on one consistent set of standards, not farmer declarations. Although the cadastral survey has been underway for almost 20 years, and work has been completed in six provinces, the results of the survey to date are unfortunately of very limited use. First, it is only an inventory of land and maintains no records of owners or claimants. Secondly, its land classification categories differ' from those being used for land taxation purposes. Thirdly, the system of measurement is technic- ally crude and has inevitably resulted in considerable inaccuracy. Finally, cadastral survey operations are extremely slow, and as a consequence, many earlier results are probably outdated. In the interest of speeding up opera- tions, more modern techniques including the use of aerial photography should - 99 - be introduced, and survey operations should be directly geared to the land reform program. 1/ 4.109 The Cartographic and Cadastral Survey Organization has an important role to play in the registration of lands and settlement of disputes. Accord- ing to the Law on Survey, Settlement and Registration of Lands, passed in 1976, teams from the Cadastral Survey Organization will visit each village, and with the help of landholders and local officials identify, measure and classify the plots. The teams will prepare maps and lists of claimants to the land and submit them to the villagers for comments. Disputes will be referred to special courts. These teams could also realign fields to consolidate indi- vidual farms. These maps will be submitted to the Land Settlement Commission along with the declaration forms and other ownership documents to (a) estab- lish the accuracy and authenticity of ownership documents, (b) determine land classes and land taxes, and (c) separate government lands from private lands. Only after approval by the Settlement Commission are ownerships officially registered and final land titles issued. The official registers will serve as the basis for final implementation of the Land Reform Law and the Graduated Land Tax. (iii) Rural Development 4.110 The fundamental goal of rural development is to raise the standards of living of the rural population. It touches many of the negative aspects of rural life in Afghanistan--the illness, the illiteracy, the poverty, and the isolation. However, viewed as a goal in itself, it is seen out of perspec- tive; the rural economy is inextricably linked to agricultural sector perform- ance and hence the overall development process. Rural development is not a mere by-product of national economic development, but rather an integral part of it. 4.111 The present Rural Development Department (RDD) was established fol- lowing the 1973 coup, and became part of the Prime Minister's office. It was provided with a charter to undertake the social and economic development of rural Afghanistan. RDD has two governing bodies. The senior body, the High Council of RDD, establishes overall priorities and develops the strategies of particular integrated rural development projects. 2/ The preparation and implementation of the ministerial programs within these projects is the respon- 1/ At the current rate, it has been estimated the cadastral survey will require another 20 years to complete. (See FAO/IBRD Report 1/77 AFS 11, Annex IX). 2/ Members comprise the Deputy Prime Minister (Chairman), and the Ministers of Irrigation, Agriculture, Education, Mines and Industries and Public Health, together with the President of RDD (Secretary). - 100 - sibility of the National Rural Development Committee (also called the Presidents' Committee). 1/ 4.112 RDD has two forms of provincial organization. In all provinces, except Helmand and Paktia, which have their own development authorities, RDD has a provincial office.2/ This office comprises a director, and about 15 staff of lesser rank, though usually no engineer. The office assists RDD teams from Kabul, makes pre-feasibility studies, and implements certain small schemes on its own. The provincial director of RDD is also the secretary of the Provincial Rural Development Committees which the provincial governors chair. The other form of organization that currently exists at the provincial level is the project committees for those provinces where integrated develop- ment schemes are proposed. These project committees may have up to 50 staff members, including a project director. 4.113 When the rural development needs are as pervasive as they are in Afghanistan, yet financial and managerial resources are scarce, interregional priorities become difficult to establish. Some regions of the country like Bamian, Oruzgan and Ghor in central Afghanistan and Badakhshan in the north- east are so inaccessible and so poorly endowed with natural resources (as far as is known) that they will probably never be able to develop economically to the level of the rest of the country. They pose the Government with a dilemma; should scarce resources be concentrated in regions where their impact will necessarily be low by comparison with the remainder of the country, yet can these people, by almost any criterion the most deprived of all, be neglected by the development process? Unless new sources of economic activity can be developed, in the longer run it is likely that they will lag behind and that significant out-migration will occur as other regions realize their potential and increase their standards of living, or the demand for labor in urban areas and abroad increases. 4.114 Regardless of ultimate development potential, their needs for social development are urgent. These areas lack health and education facilities, and are for the most part extremely isolated. These are all investments that are either relatively low in cost or investments in human capital that stand every chance of being just as beneficial to the long-run development of the country as a whole in these areas as they do in the more fortunate regions. Thus the goal of the development here should primarily be one of raising the standard of living from the perspective of social equity rather than necessarily bring- ing these regions to the economic level of the rest of the country. Although that would be an admirable goal, it is unfortunately just not possible. 1/ Members of this committee are the Presidents of RDD (Chairman), Agricul- tural Extension, Primary Education, the Literacy Campaign, CSO, Public Health, Industries, AgBank and Planning. 2/ Helmand Valley Authority does not cover the entire province though, so a significant part of the province is denied rural development activities. - 101 - 4.115 It is thus useful to think of rural development in two contexts. The first would be to focus on establishing basic social infrastructure and services that are required regardless of the potential of the region. The second would apply to regions with greater agricultural potential and would be directed to a far greater extent at developing physical infrastructure to exploit that potential. The programs of both areas would be aimed at deliver- ing the same level of health and education services and constructing a basic road infrastructure to ensure access to the regions, but the better endowed regions would contain additional investment in farm-to-market roads, and irrigation structures. This dual approach to rural development is to some extent already being followed--the Badakhshan project, for instance, stresses health, education and primary roads in an extremely poor and isolated province, whereas the rural development programs in the more prosperous provinces like Helmand and Kunduz place far greater stress on irrigation development. 4.116 In all regions though there is a need for a consistent, integrated approach to rural development. The highly successful minor civil works program of RDD is quite justifiably a priority program; however, it must be seen in proper perspective. A road, bridge, or irrigation scheme often has important social benefits such as reducing isolation, but perhaps its most important potential impact lies in the generation of new economic activity. It is hence necessary to ensure that because of such infrastructure farmers can then raise their incomes and in so doing, justify the project. Rarely can they do this on their own. Most farmers are subsistence farmers and for them to generate marketable surpluses requires extension efforts and access to inputs, including credit, and marketing channels. These services are necessary and must be made available, but doing so is a major exercise in planning and coordination. 4.117 These are the two greatest shortfalls in integrated rural develop- ment in Afghanistan today, and the problems originate at the highest level. The organizational structure itself is well conceived, but responsibilities and powers have never been clearly defined. As a result, the governing bodies of RDD, so critical to the implementation of integrated rural development on a national or even provincial scale, play little if any effective role. Com- prehensive development planning is a new and largely foreign concept to Afghanistan. Intersectoral planning, the essence of effective rural devel- opment, is an even more remote concept. But a start in this area is vital, even if some form of planning discipine has to be imposed. An approach that has proven eminently successful in other countries tackling rural development requirements of similar magnitude is the project book. All involved minis- tries and departments would include in the book a comprehensive statement of their respective programs and implementation schedules under the project. They would also indicate on maps the location of structures like schools, health centers, bridges, irrigation schemes, etc. to be constructed under the plan, and be required to keep maps and records in the book showing progress to date. Such an approach has been proposed by RDD, and currently awaits final approval by the Ministry of Planning. - 102 - 4.118 Integrated Rural Development (IRD) as such is most inadequate. IRD programs (called "regional" development) are entirely separate from the minor civil works program (see paras. 7.79-7.92). Apart from the Plan target of IRD programs in 18 woleswalis (of which five have been chosen and only one is underway) RDD and other ministries pursue development in piecemeal and hap- hazard programs of their own. In theory, the High Council (see Ch. VII) decides on an overall strategy for the region (currently the woleswali level) where it is then carried out by the respective line ministries as represented on the National Rural Development Committee, and coordinated by RDD. But in practice, things have been different. The Ministries involved (Agriculture, Public Health, and Education usually) all have their own programs that more often than not fail to include a program for the woleswali in question, and which the villagers desire. In these cases, RDD is forced to provide for the service from its own budget. RDD builds the facilities, and then supports the staff who are seconded to them to carry out the program. For instance-, in the case of a Basic Health Center, where the Ministry of Public Health has no plans to construct one, RDD rents a building, hires a staff from the Ministry, and supplies drugs. The Center otherwise operates as any Ministry of Public Health unit would. In many cases RDD has great difficulty in acquiring suit- ably trained staff, or often any staff at all from the ministries. For this reason, RDD has its own small departments for cooperatives, handicrafts, women's affairs, health, education, and agriculture. In theory, the directors of the respective services in RDD are responsible for maintaining liaison with the line ministries, but in practice they operate in isolation. 4.119 RDD is neither able, nor should it be responsible for carrying out programs that are the express purpose of other ministries. RDD really serves only one function that could not, in one form or another, be logically trans- ferred to other ministries, and that is its role as a channel of expression of village-felt needs. No other government organization exists whose focus is exclusively rural; this is what is unique to RDD and which RDD should capitalize on. Rural needs are so great and the current RDD program so small that for RDD to try and take over the functions of the line ministries is impossible; on the other hand, for both to be working on the same programs is not only superfluous but inefficient. 4.120 The future role of RDD will undergo slow transition. The highly successful minor civil works program of RDD should remain and be expanded. There are many reasons which can be identified. First, these projects are partly self-help and thus fit easily into the RDD.system. Second, no other ministry has the responsibility for such works--the Ministry of Public Works is currently too occupied with developing the main provincial roads, and the Ministry of Water and Power with major irrigation schemes, to give small rural works any priority. In the longer run though, these ministries through their local representatives will have to assume responsibility for construction programs, with RDD responsibility confined to instigation and coordination of ministerial programs. Small pockets of concentrated development in an other- wise largely neglected countryside, or small civil works, are not the goal of rural development, they are only the beginning. - 103 - (iv) Agricultural Cooperatives 4.121 Small farmers who do not own large amounts of land usually find it difficult to obtain credit and modern agricultural inputs. But the majority of farmers in Afghanistan fall into this category and reaching them is impor- tant, both for raising agricultural output and improving the quality of their lives. Agricultural cooperatives can play an important role in this. The origins of the current cooperative program in Afghanistan trace back to the SIDA-financed PACCA pilot project of 1969-73. The purposes of that project were to study the feasibility of a cooperative movement in Afghanistan based on (1) provision of agricultural credit; (2) provision of extension services; (3) access to markets; and (4) providing a base for functional literacy pro- grams. Following the coup of 1973, it was decided to expand the program nationwide. The Cooperative Law and Cooperative Bylaws were promulgated in 1974. Since then the movement has grown rapidly from 3 co-ops in 2 provinces in 1973 to 102 in 12 provinces by mid-1977, with 9,095 members. During the Plan, the number is to be expanded to 291 covering 3,000 to 4,000 villages (about one sixth of the total number of villages). 4.122 Cooperative membership is limited to farmers owning at least 3 jeribs of land (0.6 ha). Although not explicitly stated in the law, in the interpretation of the Ministry of Agriculture, sharecroppers are excluded. Members must purchase between 1 and 10 shares costing between Af 250 and Af 900 each. In addition, annual dues of Af 200 per share are usually required. At the Annual General Meeting each cooperative elects a Managing Committee of at least 5 members to oversee day-to-day operations. Attached to each coopera- tive is an official from the Ministry of Agriculture who keeps the books and assists the Managing Committee. In addition, for every five co-ops there is a technician who promotes and supervises co-ops in the surrounding area. Final- ly, in every province with cooperatives there is a Director of Cooperatives and staff attached to the Department of Agriculture. Secondary cooperatives, or cooperative unions, are still in the embryonic stage. So far two such unions have been formed (in the Kabul area) for the purpose of coordinating raisin sales. 4.123 The cooperative program is centrally guided. Areas suitable for cooperative development are determined and budgeted for by the Ministry of Agriculture in Kabul. It is then the responsibility of the provincial Director of Cooperatives to motivate the farmers into establishing co-ops in the province concerned. Despite a concerted government effort to establish cooperatives, the program is only progressing slowly; many cooperatives have less than 50 members and the average membership is only 90. 1/ Tying up 31 government employees together with vehicles to supervise 7 co-ops with 595 I/ One possible reason for relative unpopularity especially in the north was that the cooperative program bears unfortunate resemblances to the forced collectivization in the Soviet Union, from where some Afghans migrated in the thirties. - 104 - members, as is currently the case in Baghlan, is inefficient. And establish- ing more co-ops is hardly the answer considering the additional manpower each individual co-op requires. The co-ops must be made larger, nearby villages must be incorporated into existing co-ops and greater farmer participation elicited. Afghan farmers have shown that when there are tangible benefits to be had, they will cooperate. For instance, the repairing and maintenance of irrigation systems are done in common. 1/ 4.124 The two most effective functions the cooperatives perform so far are access to credit for inputs and marketing. Although co-ops do not provide credit or inputs to any farmer who would not otherwise be eligible, farmers claim the process is easier and less time consuming, as only one representa- tive from the co-op need negotiate for loans. Short-term production loans by AgBank to co-ops (and almost all is for short-term credit) are at 9 percent (vs 10 percent to individuals), with the 1 percent margin usually being kept by the cooperative. These loans are then usually made in kind. In 1976/77 the AgBank lent Af 23.7 million to 42 cooperatives for production purposes. This amounted to only about 2,200 tons of fertilizer. Marketing activities have so far been confined to raisins and pomegranates, and are concentrated in three provinces - Kabul, Kandahar, and Jowzjan. In 1976/77, Af 18.2 million were lent to 19 co-ops for marketing. 4.125 Experience has shown that the cooperatives which are most successful in promoting more intensive agriculture and helping reduce poverty are those that provide farmer-perceived needs like access to credit, distribution of inputs, and access to markets. A foundation upon which to build the coopera- tive program has thus been identified. In addition to facilitating the use of fertilizer and improved seeds,. cooperatives could enter into cotton market- ing. Currently, many farmers complain of their dealings as individuals with the cotton companies. This undoubtedly steers many farmers away from cotton, thereby decreasing production. Such transactions would undoubtedly become easier if co-ops were involved. Similarly co-ops could also be based on the collection and marketing of vegetables. However just as important in the longer run is the cooperatives' role as a rural institution that provides a specific focus for activities like extension, public health and nutrition. Only when cooperatives assume a more varied and productive role can they effectively improve rural life and hence justify the large costs of the program. I/ In some areas, community can go so far as to resemble a true coopera- tive. In areas where there is insufficient water to irrigate all farmers' fields adequately, farmers cooperate and farm collectively as much of their land as the water can support. They contribute to inputs and receive as much output, in the proportion of their land to the total. Each year different land is farmed to allow for equitable depletion and fallow, and each farmer maintains the title to his land. These informal cooperatives (called peykals) are usually in the north and organized along ethnic lines. - 105 - V. PRIVATE NON-AGRICULTURAL ENTERPRISES 5.01 Although it is land-locked, Afghanistan's situation along the east-west trade routes has always given it access to foreign markets. With the limited range of domestic products there has been reciprocal de- mand for foreign goods. For the most part non-agricultural enterprises in the private sector in Afghanistan have therefore evolved around trade services. Informal financial institutions, outside the organized banking sector, have developed in parallel, dealing in foreign trade transactions, domestic agricultural production and trade, and of late, the increasing flow of workers' remittances. The typical scale of private non-agricultural enterprise in Afghanistan is small and family-based, but collectively they dominate external trade, handicrafts production, domestic distribution, and transport services. In recent years there have been wary and frequently unsuccessful attempts to move to larger scale enterprises in industry, urban distribution, and transport. There is at present evident interest in accel- erating this process. Many traders and landowners have accumulated large agricultural and trading profits in recent years, and now seek to diversify their activities. With changing social perceptions following from increas- ing contacts with the outside world, the middle-class no longer seems to regard careers outside the army and the bureaucracy as unworthy of pursuit. There are still formidable barriers to this transition, however, in the form of Government restrictions and disincentives, as well as a shortage of educational and managerial know-how needed to operate large and complex enterprises. A. Role of Private Non-Agricultural Enterprises in the Economy 5.02 It is likely that more than 40 percent of GDP and employment in Afghanistan originates in non-agricultural private enterprise (See Table 1, p. 9). About a third of this would be secondary activities such as handi- crafts and industry, while the balance consists of services. The major private sector activities outside agriculture are as follows: (i) Handicrafts 5.03 Handicrafts constitute about 8 percent of GDP and engage about 18 percent of the settled labor force. Employment in handicrafts is probably many times that of industries, and handicrafts also contribute a larger share of the GDP (see Table 1). Production is carried out in families and most of the work is done by women and children. Products are specialized by region. Carpets and rugs are concentrated in the north and north-west, textile embroidery and leather goods are found mostly in the south (Kandahar region), wood and stone carving is concentrated in the north-eastern prov- inces, and jewelry and lapidary (i.e., crafting of lapis lazuli stones for inlay in precious metals and as small figures) are mostly carried out around Kabul. - 106 - 5.04 Of the handicrafts, carpets and rugs constitute the most signifi- cant item contributing about $24 million or about 8 percent of annual exports (1976/77). In addition, a considerable volume of carpets and rugs may be exported through unofficial channels. Afghan carpets are of the hand-knotted, pure wool variety and are greatly in demand in Western Europe. Of late, the phenomenal rise in the prices of Iranian carpets has encouraged buyers to switch to Afghan carpets. Among other items, sheepskin jackets have been a growth item in recent years and remain fashionable in Western Europe. The same is also true of other types of leather goods, such as handbags and sandals, and embroidered textiles. There has also been a recent upsurge in demand for lapis lazuli products. There are a few large firms, mainly dealing in carpets, which export directly to their market outlets in Western. Europe and USA but for the most part sales are made by a multitude of small local traders to the representatives of foreign buyers and tourists. 5.05 Production techniques in handicraft industries are simple and non- mechanized; they have barely changed for generations. Apart from carpets and rugs, the quality of handicraft items produced in Afghanistan is generally not very high. Often labor-intensive work such as embroidery is put into inadequately prepared sheepskin coats and leather goods. Leather is poorly cured, kilns are too small for proper firing of pottery, and jewelry makers have no proper polishing equipment. Afghanistan has not yet improved its techniques of handicraft production. Consequently, in spite of low wage costs, Afghan handicraft products are sometimes not competitive in export markets. Being dispersed throughout the country, in probably more than 80,000 establishments, and lacking any form of association, handicrafts are generally inelastic in volume and design of production. These are determined either by the immediate local market they serve or the trader who in many instances also provides production materials and in some cases the operating capital needed. 5.06 The main assistance which the handicrafts sector receives from Gov- ernment is in securing export orders. This is done through the Export Pro- motion Department in the Ministry of Commerce which has been quite successful in developing export markets for Afghan carpets, and locating producers to execute orders. It does not, however, provide credit to producers. The bazaar money traders are the main source of finance and their lending is at very high rates of interest. Furthermore, the credit they provide is short- term. The recently established Export Promotion Bank could ease the sector's financing needs by lending to traders who could in turn pass on the credit to producers. However, like bazaar finance, this type of credit is also short- term and would not permit a handicraft producer to purchase better tools for example. There is thus a need to create a longer term source of finance. The proposed Development Assistance Fund of the Industrial Development Bank has the potential to meet this need (see para. 5.27 below). The only other direct support to handicrafts is provided by the Afghan Handicrafts Promotion Center, a semi-public institution with equity participation by the Chamber of Commerce and Industries. While the charter of activities of this Center is quite wide and includes technical and commercial assistance to producers, its present activity is confined to the management of the Afghan Handicrafts Emporium. - 107 - The Seven-Year Plan (Volume I, pp. 134-135) indicates an awareness of the problems but does not propose a concrete program of action. 5.07 The following program of actions to be taken over time can be delineated: (a) Establishment of common regional processing facilities for groups of producers e.g., bleaching and dyeing of yarn or woven fabrics, curing and chroming of leather, kilns for ceramics, etc. Where appropriate these could be on a cooperative basis. (b) Encouragement of partial mechanization of the production processes through access to credit and demonstration services by the Afghan Handicrafts Promotion Center which should also provide the necessary training. (c) Quality control facilities such as certification by the Afghan Handicrafts Promotion Center. This would con- siderably alleviate the foreign buyers' uncertainties with respect to the quality of the merchandise. (d) Liberal credit facilities through the Export Promotion Bank, the Commercial Banks and the Development Assistance Fund of the Industrial Development Bank. The latter would be of particular importance as a source of longer term credit. Considerable promotional effort, however, will be necessary in this regard. 5.08 These recommendations are presented as a set of objectives for the Government to work towards over time, rather than proposals for immediate implenentation. The institutional base is simply not strong enough at present to support these activities and inserting Government controls and weak insti- tutions into the sector at this point would do more harm than good. The Export Promotion Bank and the Development Assistance Fund for example are just getting off the ground and it seems reasonable for them to cut their teeth on their primary objectives rather than launching into wholesale support of handicrafts without the experience and the regional branch network which would be needed for this purpose. The most promising initial approach would seem to lie with the Afghan Handicrafts Promotion Center. Steps should be taken to strengthen it and expand its responsibility. At a later point in time it could be asked to play an 'extension' role in guiding producers who need financing through the procedures of the commercial banks and the specialized banks. 5.09 Afghanistan's varied and attractive handicrafts represent a promising potential for expanding output and income. The prospects on the demand side are good. Supplies are small relative to total world demand for these items and erstwhile competitors such as Iran are emerging as buyers of Afghan handicrafts, as a result of their new affluence. Demand would be given an important boost if the Government were to adopt an active program of promoting tourism. Tourist arrivals have been virtually stagnant since 1970. Exchange - 108 - rate policies are another area in which Government policy will be important. Given the right policies and greater institutional support there is evidence that the private sector will respond effectively in this as in other areas. (ii) Artisans and Small-Scale Industrial Enterprises 5.10 There is a small but rapidly expanding informal industrial sector in Afghanistan. It is located mainly in Kabul, but is represented in the other major towns as well. It includes such enterprises as auto repair establish- ments, machine shops with facilities for metal-fabrications, repair shops for electrical and electronic goods, furniture making, etc. The scale of these enterprises is larger than the average handicrafts establishment but would probably not have machinery of a value much more than Af 100,000. Compared to the employment in the handicrafts sector, the labor force in this type of enterprise is small. Nevertheless, these small-scale operations perform essen- tial economic services. For example, the auto repair facilities and small machine shops are almost entirely within this sector. As in many developing countries, however, there is very little data on this group of activities, which contributes to the underestimation of their importance and potential. 5.11 These establishments occupy the intermediate stage between handi- crafts and industrial establishments and have the potential to progress into the latter. This has been the pattern in other developing economies, India and Pakistan for example, which may be replicated in Afghanistan. Already such transformations are taking place. Kabul Felez, a small metal fabrica- tion enterprise is a case in point. This enterprise started as a small repair shop by a graduate of the Kabul Polytechnic with hardly any capital. Progress has been very rapid however, and the original repair shop is now one of the prime suppliers in Afghanistan of steel furniture and other fabri- cations. Similar potential is obvious in many other cases. Some of the auto repair shops for example could over time graduate into dealer franchises and eventually into assembly. Encouragement of such enterprises which is proposed through the Development Assistance Fund (DAF) of the Industrial Development Bank (IDBA) could be enormously productive in fostering entrepreneurial talent, employment, and the use of intermediate technologies which are more appropriate to Afghanistan's stage of development. 5.12 It would be idle to pretend, however, that current proposals do more than scratch the surface of the potential which exists for small-scale enterprises in Afghanistan. The present and proposed development is con- centrated in the Kabul area, yet the major potentials would seem to be related to the growth of agricultural production and incomes in a widely dispersed regional pattern. This dispersal, which has probably hampered the growth of medium-scale enterprises in Afghanistan, can be turned to advantage if local craftsmen can be provided with the small amounts of capital they need to up- grade the quality and increase the quantity of their output. The commercial banks could play a significant role in fostering and financing such activities in the cities and towns other than the capital. The regional network, which IDBA proposes to establish over time, would go a long way in this direction through providing entrepreneurs outside Kabul with access to the proceeds of the DAF. - 109 - (iii) Industrial Enterprises 5.13 The history of the private sector industrial enterprises is fairly recent, dating back to the pioneering efforts of Bank-i-Melli, established under Government patronage. (See para. 2.19.) The etatist policies of the 1950's severely restricted private activities and the development of the sector on an expanded scale really began only during the late 1960's, in response to the 5-year tax holiday and other incentives provided under the 1967 Foreign and Domestic Private Investment Law (FDPIL). The main benefits granted were as follows: (a) five-year exemption from income tax (b) five- year exemption from import tariffs on capital goods, raw materials and spare parts, and (c) ten-year exemption from export taxes. 1/ 5.14 Private medium-scale industry in Afghanistan consists of about 130 establishments employing about 10,000 persons. The list of major indus- trial enterprises in Volume II, Table 8.4 shows five private sector companies with an employment of 200 or more persons. The largest, a tannery and shoe factory, employs about 500 persons. Two of the largest private manufacturing units have minority foreign equity participations. Valued at the original investment, total private foreign investment in these firms would probably not be much more than Af 500 million. For a country of Afghanistan's size, even taking into account the low income per capita, this level of foreign invest- ment is exceptionally small and it is legitimate to ask why this has been the case. The reasons probably lie mainly in the adverse investment climate for all private industrial investment, but there are other contributing factors. As far as export-oriented projects are concerned, although Afghanistan has low wage costs and cheap raw materials these advantages are compensated by the high transport costs. Low wage costs are often illusory in the absence of trained and skilled labor. With regard to import substitution, foreign suppliers have usually preferred to serve the small Afghan market by exports from a larger manufacturing base, rather than by establishing a small-scale production facility within the country. 5.15 Private medium industrial establishments in Afghanistan appear to have the following characteristics: (a) There is a heavy concentration in import-substituting industries. 72 out of 108 FDPIL approved projects fall into this category constituting 80 percent of the total investment. The principal industry groups represented are rayon weaving (18 projects), plastic products in- cluding footwear (12 projects), and metal fabrication (8 projects). 1/ The FDPIL was revised in 1974 so that at present the details do not quite correspond to the 1967 provisions. A detailed description of the provi- sions of the FDPIL and the procedures which it involves are given in Vol. II, Table 8.7. In substance it remains a very favorable program of incentives from the standpoint of increasing the profitability of private industrial investment. - 110 - (b) Of the remainder, 28 are identifiable as export-oriented projects. The most important of these are leather and tanning (10 projects), and raisin processing (9 projects). (c) About 86 percent of the total estimated investment is con- centrated in the Kabul area, with no other city accounting for more than 4 percent. 5.16 Almost all the enterprises referred to above were either under con- struction or in operation in 1973. Since then by mid-1977 only 28 new indus- trial projects had received final approval under the FDPIL, and only six of these were actually in operation. For the rest, the promoters seem to have elected to move rather sedately on implementing their projects. Twenty-nine other projects were at various stages of approval. The complex approval procedures with their final stage involving a decision of a group of cabinet ministers, normally take about 12 months to complete. In 1976/77 investment proposals received totalled Af 172 million while approvals totalled Af 94 million. This is well below the average investment in private industry during the preceding seven years of Af 254 million and does not augur well for the attainment of the present Plan target of over Af 1 billion a year of private industrial investment. (iv) Trade Services 5.17 Trade services make an even greater contribution to GDP than handi- crafts though they employ a smaller number of the labor force, about 6 per- cent. Domestic distribution is almost entirely in the hands of the private sector as are most of the commercial imports (i.e., those not financed by foreign aid) and exports. The major exceptions are the commodities for which Government trading monopolies exist. These are imports of sugar, petroleum and tobacco and exports of natural gas and cotton. 5.18 The typical profile of a local trader is that of a surplus farmer diversifying into trade, and perhaps also into transportation services. His relations with his customers are long-established and he is an important pillar of his small community. His outlet is a small store in the nearest market town. His scale of operations is generally small, around Af 100,000 with access to credit from larger traders in the urban areas. These larger traders often operate as money lenders as well. They are generally wholesalers with traditional business links with regionally scattered groups of traders clus- tered in the bazaars of small towns and the main villages along the highways. Of late, more and more of the large traders are engaging in retailing imported goods in the urban areas. The scale of operations is significantly higher in foreign trade. Generally, a minimum working capital of about Af 10 million (about $200,000) is needed and the trade is dominated by established merchant houses for whom this is a traditional occupation. These traders do not, in general, belong to the landed gentry although there are a few exceptions. Trading is still not looked on as a socially desirable career although there are signs of change and an increasing willingness in the new generation to consider careers in industry and trade. - III - 5.19 Unlike the multitude of small local traders, the bigger merchant houses are increasingly becoming efficient modern operators. Knowledge of foreign market conditions is avidly sought through travel and business links with foreign suppliers, and distributors are being established on a regular basis. There is also a noticeable tendency among the exporters, encouraged by the Government, to group together to improve their bargaining strength in external markets. The Export Promotion Department in the Ministry of Commerce has been very helpful in this regard particularly in bilateral trade arrangements. The creation of the Karakul Institute is a case in point; it is an association of karakul traders, established through Government initiative, which handles all1 export trade in karakul. The Institute has been very effective in maintaining Afghanistan's portion in the international market, and it is being regarded as a prototype for promoting the export of other appropriate commodities. 5.20 A significant number of the large traders are also linked to the bazaar money traders which provides them with a channel of diversification (i.e., alternative investment opportunities) and also a source of credit. The access to credit is, however, not limited to the trading houses. Indeed the bazaar money traders constitute the primary source of credit for all traders, large or small alike. The organized banking sector is often avoided, despite its more attractive terms because of the cumbersome procedures, and fears [-hat banking information will be made available to the tax authorities. (v) Bazaar Money Traders 5.21 The bazaar money traders constitute one of Afghanistan's most important economic institutions. There are probably less than 50 dealers located mainly in Kabul with a few in Kandahar and Herat, with correspondents and agents operating in other urban centers. There are two distinct types of operations the bazaar money traders deal in, namely, domestic financing such as the distributive trade and agricultural production, and the financing of foreign trade. Although the money bazaar's role in the finance of agricul- tural production is decreasing because of the availability of credit from the Agricultural Development Bank, it still has a virtual monopoly of lending to domestic trade. Similarly, although the role of the bazaar in financing exports has been gradually usurped by the official banking sector, it still finances a substantial share of imports. More recently the increasing flow of workers' remittances throuigh the money bazaar has added to its resources and stature. For the reasons cited in the preceding paragraph organized banking is often avoided and the bazaar money traders, through their regional correspondents, have a virtual monopoly of the intermediation of workers' remittances. This is a natural complement to the international banking carried out by the bazaar. The traders in the money bazaar invariably maintain foreign correspondent bank accounts and it is possible to have rapid clearing transactions through them without hindrance. The Kabul money bazaar at times has played the role of middle-man for capital flight from the neighboring countries. Substantial premiums have been earned through this. - 112 - 5.22 The money bazaar acts as an alternative, unofficial banking system, not subject to.direct control by the authorities, but adding tremendously to the flexibility of the overall financial system. There is a grudging admission of the important role which the bazaar plays by the authorities. The banking institutions are not at present able to assume this role and as a result the bazaar has been allowed to flourish in recent years. Its legal status is still ambiguous; the bazaar's foreign exchange transactions are clearly in violation of Afghanistan's foreign exchange regulations. 1/ But the authorities are clearly disposed towards its continued if often covert operations. 5.23 The bazaar's role as an unofficial banking system obviously creates problems for those responsible for monetary and exchange rate policy in Afghanistan. The approaches to these problems are discussed in Chapters XI and XII. More to the point in this section however is the potential role which the bazaar could play in promoting and financing private industry. It is surely not too far-fetched to see the money-bazaar traders as important links in a chain which could lead to the rapid development of private indus- try in Afghanistan. It may well be that rather than to try and displace the bazaar traders, the formal banking system should attempt to steer them in the direction of investment banking and to provide the facilities which might make such a transition possible. (vi) Formal Financial Institutions 5.24 In the organized money market, there were, until a few years ago, only three banks. Da Afghanistan Bank is the central bank and also performs some commercial banking functions. Pashtany Tejaraty Bank is a government bank, which provides financial assistance primarily for trading activities. Bank-i-Melli started as pure-ly a commercial bank in 1930 but later also moved into establishing large industrial ventures for which it acted as a holding company. New banks have been established in recent years, namely, the Agricul- ture Development Bank (AgBank), the Industrial Development Bank of Afghanistan (IDBA), the Mortgage and Construction Bank. All of these banks became government-owned under the Bank Nationalization Law promulgated in May 1975. In 1976, the Government established a new bank, the Export Promotion Bank. 5.25 In the past, the banks were not very active in providing finance for industry. The development of the private industrial sector in recent years has been financed mainly by the savings and accumulations of the in- vestors themselves, together with foreign capital and loans from foreign partners, and suppliers' credits. IDBA was founded in March 1973 with a share capital of Af 240 million (US$4.2 million), 60 percent of which was contri- buted by Afghan interests and 40 percent by the International Finance Cor- poration (IFC) and five other foreign banks. As mentioned above, following 1/ As embodied in Decree 2632 of 1951 which is still substantially in force as the Da Afghanistan Bank is yet to formulate new regulations under the new Money and Banking Law of 1975. - 113 - the nationalization of banks in 1975 it is now fully owned by the government. IDBA can provide loans to private industry for both fixed assets and working capital. It can also participate in equity (and has in fact done so in the Yakoob Tannery Company). In practice, though, IDBA has not been able to provide any significant financial assistance to private industry, as only a few private industries have been established since 1973. IDBA, however, maintains regular contacts with present and prospective investors in the private sector, helping them in appraising their financial requirements for existing and new projects, and seeking to interest them in utilizing assis- tance available from IDBA. At the request of the Government of Afghanistan, IDBA has also carried out prefeasibility studies, appraisals of projects, studies on custom tariffs, etc. With a view to identifying industrial oppor- tunities, IDBA has also set up a Project Investigations Department which over a two-year period carried out preliminary investigation of more than 100 products. In general, IDBA has been fairly successful in these ancillary activities and has established a core of Afghan staff with competence in these areas. In the absence of financing opportunities, the day-to-day activities of IDBA have thus taken on a management consulting character. IDBA also performs some lobbying function on behalf of private enterprise. Apart from these activities of IDBA, and limited occasional advice on financial matters by other banks, there is a lack of facilities from which private industry can draw managerial or technical support. There is only one accountancy firm operating in Afghanistan (another has been approved under the FDPIL but has yet to start operation). There are no formal management consulting or indus- trial research organizations. 5.26 The presence of large agricultural and trading profits seeking industrial opportunities does make the lack of institutional credit facili- ties less of an impediment than it could otherwise be. Nevertheless, it constitutes a limiting factor on the establishment and expansion of small- scale industrial establishments. IDBA was previously unable to lend to this category of industries because these small entrepreneurs had difficulty in meeting the normal collateral requirements. Accordingly, in July 1977 the Government created a subsidiary loan facility, the Development Assistance Fund (DAF) to be administered by the IDBA, exclusively for this type of industry. 5.27 The loan facilities from the DAF are for projects with a value of fixed assets, excluding land and buildings, not exceeding Af 4 million ($90,000). Collateral requirements have been liberalized for purposes of DAF loans. It is probable that -most of the small-scale enterprises currently in Afghanistan would be eligible on this criterion. A large number of handi- crafts products are also covered by provisions of the DAF. The emphasis will be on the managerial and technical qualities of the borrower and the enter- prises will be regularly supervised by the IDBA staff. Procedures for loan processing are simple; although reference to the Private Investment Committee of the Government for approval and granting of FDPIL privileges is still required, the procedures have been abbreviated for this category. The initial response to the creation of the Development Assistance Fund has been encourag- ing. By end-November 1977, 53 enterprises had been approved (see Table 21 below). - 114 - Table 21: SMALL SCALE ENTERPRISES APPROVED UNDER THE DEVELOPMENT ASSISTANCE FUND (Af. million) Sub-Sectors No. Fixed Assets Working Capital Total 1. Engineering 6 16.0 3.0 19.0 2. Textile 5 18.7 12.7 31.4 3. Agro-Industries 5 23.2 35.2 58.4 4. Wood Products 5 9.0 2.7 11.7 5. Handicrafts 11 7.8 4.9 12.7 6. Others 21 50.2 17.2 67.4 53 124.9 75.7 200.6 Source: Industrial Development Bank of Afghanistan, Kabul. The aggregate investment of less than $5 million means that this is still only a small beginning relative to the potential, but all in all, the response to the creation of the DAF is very promising when viewed against the background of the stagnation of private investment of the past few years. B. The Constraints to the Development of Private Industry 5.28 Afghanistan's low per capita income and low consumption elasticity for manufactured goods, its isolated pattern of human settlements and under- developed physical infrastructure impose severe restrictions on the nature and scale of private investment possibilities in Afghanistan. Apart from the urban population of about 2-2.5 million, the rest of the population are dispersed in villages often remote from the transport system, and transient nomadic settlements. This necessitates narrow localized markets and limits the mobility of labor. There has been some alleviation of this constraint in recent years through the construction of national highways and secondary roads. In all, about 4 to 5 million people are now within a day's journey from the capital by truck or bus. There is still some way to go, however, before Afghanistan assumes the features of an integrated economy. 5.29 The isolated nature of the economy is equally apparent from the viewpoint of conducting foreign trade. Transport costs often amount to about 30 percent of export values. Equally important is the lengthy transportation time necessitated by the distances to European markets and the need to transit through multiple national boundaries. The isolation of the economy thus limits the country's trading possibilities restricting them to relatively high value/ low volume items. There is an awareness of the constraint that isolation imposes on the economy, the building of a national highway network attests to that. The recent commencement of operation of two container freight services for intercontinental traffic will greatly help the process of integrating the economy domestically as well as with the neighboring countries. This is likely to prove of great significence in the light of the excellent market - 115 - prospects in Iran and the Gulf countries for fresh and processed foodstuffs and simple manufactures. 5.30 Industrial development in Afghanistan is further handicapped by a widespread lack of other infrastructure facilities, viz. power, water and factory space for rent. While these facilities are reasonable in Kabul, they range from poor to non-existent in other cities and they greatly inhibit the regional dispersion of industries. An industrial park is being established near Kabul, with technical and financial aid from India. It is intended pri- marily for small to medium-sized industries, and is at present the only such facility in Afghanistan. A four-stage project is envisaged within the Seven- Year Plan with the first two phases already completed covering about 140,000 square meters. Sites are served with electricity and water and there is to be a common facilities center, including a machine tool shop, laboratory, etc. There is however, no sewerage or drainage. The charges for the sites compare very favorably with what industrialists are accustomed to paying for similar plots with much inferior facilities. The park is now ready for occupation. The Industrial Area Development Authority, a part of the Ministry of Mines and Industries, which is responsible for the park, has received 88 applications for the first 24 vacancies. There are proposals for setting up similar indus- trial parks in other industrial centers in Afghanistan at Mazar-i-Sharif, Herat and Kandahar. 5.31 It is clear that uncertainty regarding the future of the private sector in medium-scale industry has adversely affected the climate for invest- ment since 1973. This uncertainty was intensified by the nationalization of the banks in 1975 which resulted in state control of many of the larger-scale enterprises. This understandably caused hesitation on the part of investors. To date there is no legal guarantee against further expropriation. The relevant clauses of the constitution, although they do not explicitly limit the private sector, are open to that interpretation. Article Thirteen reads: Resources such as mines, forests, and energy, large industries, communication, important air and surface transport establishments, ports, banks, insurance, important food procurement establishments--are part of the nation's property and their administration shall belong to the state, in accordance with the provisions of the above (unofficial translation). Article Seventeen states that: Private investments and enterprises in the field of intermediate, small and cottage industries shall be encouraged, protected, and guided in accordance with the provisions of the law (unofficial translation). This has understandably led to uneasiness on the part of existing and potential entrepreneurs in medium- scale industries. Nor have some of the actions of the Government served to reassure the private sector. There has been extreme reluctance to grant approvals under the FDPIL and the enforcement of income taxation has perhaps been overzealous in its approach to private industry. In these circumstances there must be doubt about the ambitious targets for private industrial investment during the Plan. In middle and late 1977 some encouraging steps have been taken however through the establishment of the DAF and a declara- tion on the confidentiality of bank accounts. This is a good beginning to establishing the Government's bona fides in this area. 5.32 Most of the new entrepreneurs establishing projects under the FDPIL are from the trading class with considerable knowledge of markets within -116- Afghanistan and in some cases abroad, but with little kniowledge of industry or of the management skills it requires. Some entrepreneurs are young, edu- cated Afghans who are seeking a more challenging and potentially more profit- able outlet for their energies. Their lack of industrial tradition and direct experience has inevitably led to many teething problems in the development of private industrial enterprises in Afghanistan. It is evident that a number of projects were misconceived. Small enterprises using simple technology sought to compete with larger operations able to produce at lower unit prices. The implications of simultaneously establishing a number of competing enter- prises in the same field were often clearly disregarded. Market research and project appraisal had rarely been undertaken before the industry was set up. As a result, enterprises found themselves competing with cheaper imports, which in many cases would anyway have commanded a premium from consumers over domestically produced items. These factors explain the persistence of low utilization of capacity in many manufacturing plants and the pile-up of large stocks of unsold merchandise. Capacity utilization levels are rarely above 50 percent of one shift-operation and some factories carry about six months' stocks of finished products. The inexperience of management, the paucity of technical skills, the lack of any real understanding of the nature of the problems likely to arise in an industrial undertaking--these factors define the industrial infancy of Afghanistan's private sector. Fortunately there is evidence in the best private sector firms that the problems can be overcome. In addition, the private sector has wisely concentrated on operations which are fairly small and simple, so that the level of management skills required is often not high. 5.33 As in most developing economies seeking to industrialize, Afghanistan provides substantial protection (through customs duties, excise, sales taxes, exports taxes, etc.) to its industrial sector. Effective tax incidence on domestic industries varies widely but as is shown in Table 22 below, in general Table 22: 1976 COMPARATIVE TAX INCIDENCE IN PRIVATE SECTOR INDUSTRY /a (In %) 'Effective' tax incidence 'Nominal' tax on domestic products incidence on Sub-sectors receiving FDPIL concessions competing imports 1. Textiles a. Rayon 33.0 68.0 b. Knitting 14.2 68.0 2. Leather and footwear 4.3 108.0 3. Pharmaceuticals 15.8 18.0 4. Detergents 11.8 28.0 5. Lubricants 12.1 43.0 6. Automobile batteries 21.5 43.0 7. Plasticware 8.3 35.0 /a Exclusive of income tax. Source: IDBA. - 117 - it is substantially below the effective tax incidence on competing imports. In Afghanistan however, this protection is not the whole story. Competition from smuggled imports places strict limits on the amount of protection which can be given to domestically produced goods. Many imported consumer goods enter through illegal channels without payment of tariffs and other charges. For those imports coming through legal channels, there is also widespread under-invoicing with or without the connivance of customs officials, as a vehicle of tax evasion. Many private industrialists consider that this out- weighs the formal tariff protection. Undoubtedly domestic manufacturers also sometimes underdeclare the values of imported raw materials, but the require- ment to give details on their anticipated operations to qualify for tax priv- ileges under the FDPIL, restrains the scope for such tax evasion. Finally, it seems that certain competing imports are under-invoiced as vehicles of capital flight from neighboring countries into Afghanistan, where funds can then readily be converted into major international currencies; such imports sometimes sell at a discount within Afghanistan and put local industry at a further disadvantage. 5.34 Private sector industries suffer from another definite handicap: the administration of the income tax. The written law is not unusually burdensome in terms of rates and their progressivity but it lacks a statute of limitations on assessments. Moreover, administrative practices relating to the tax pose a very considerable disincentive. Assessments are arbitrary and provisions for exemptions and deductible expenses are often not observed. Unfortunately, there is no judicial appellate procedure and the threat of reassessment of past tax returns is enough to prevent a challenge to current assessments. The income tax law, as administered, favors private businesses with no fixed assets, particularly traders. Once fixed assets are acquired, they automatically draw the attention of the tax inspectors who then have a basis for estimating taxable income. This implicit tax preference is fre- quently cited as a cause of the relative popularity of trade and the slow growth of industry. C. Realizing the Potential of Private Industry 5.35 A change in the environment for private enterprise in Afghanistan would bring major benefits through harnessing the surplus agricultural and trading profits which are in search of investment opportunities. The current restrictive policies will needlessly reduce the country's opportunities for growth. The narrow localized domestic consumer market suggests the need to foster a decentralized pattern of small-scale investment in the production of consumer goods. Significant market opportunities are also emerging in the neighboring countries, particularly in Iran, where rapid development is increasingly shifting production to high technology large-scale operations, and import demand for simple manufactures with high labor content (viz., textiles, footwear, processed foodstuffs, furniture, etc.) will accelerate. These present ideal opportunities for small and medium-scale enterprises and are well suited to the present state of the private sector in Afghanistan. - 118 - 5.36 The Seven-Year Plan shows an awareness of the potentials for private industry. Af 8.5 billion (about $180 million) is projected for private indus- trial investment during the Plan period. This implies an annual investment of Af 1.2 billion during the Plan period, as compared with Af 254 million annually during the preceding seven years. To illustrate the difficulties of achieving such a target, during 1976/77 total investment proposals before the Private Investment Committee were about Af 172 million of which Af 94 million were approved. The issue facing the Government is how to change the investment climate so as to bring the Plan targets within realistic reach. 5.37 What are the constituents of a more supportive policy environment for the private sector? A first step would be the clarification of the ambigui- ties of Articles 13 and 17 of the Constitution. The former reserves a variety of enterprises for the public sector but leaves the Government's intentions about the rest unclear. The latter relegates the private sector only to small-scale enterprises. The newly approved DAF facility of the IDBA defines these as enterprises with fixed assets excluding land and buildings of Af 4 million or less. The Government's intentions with regard to enterprises beyond this size remain unclear. The Government should publish a list of industries reserved for the public sector. For the rest, private investment should be permitted regardless of size, with assurances against further nationalization. 1/ 5.38 Beyond the basic change in policy environment which the above would signify there are a host of other changes of importance. First and foremost among these would be taxation policies. The administration of the income tax constitutes a major disincentive and needs to be reformed. Four actions are needed: (i) the enactment of a 5-year statute of limitations on assessment; (ii) the institution of a judicial appellate procedure; (iii) clarification of deductible expenses; and (iv) acceptance of accounts prepared and certified by chartered accountants in accordance with the relevant statutes as a basis for tax assessment. The institution of these provisions would help to dispel the popular image of income tax administration in Afghanistan as an arbitrary and punitive instrument and would thus constitute a substantial improvement in the investment climate. 5.39 To facilitate regionalization of investments, the proposed indus- trial parks supplying basic infrastructure facilities at Mazar-i-Sharif, Herat, and Kandahar should be expedited. Furthermore, the IDBA should establish regional offices in these areas to insure that its funds and those under the DAF are available locally. 1/ A listing of the private industrial potentials identified in the IBRD Industry Sector Report is given in Vol. II, Table 8.5. See also IBRD Report No. 1245-AF: Industrial Sector Review of Afghanistan. - 119 - 5.40 Another area of action relates to the complexity of the FDPIL procedures. The current procedure for approval of applications is too time- consuming, requiring as it does that every project be approved by the Invest- ment Committee. The latter, involving ministerial representation, meets only infrequently. Some aspects of the current FDPIL procedures do perform a useful function in assessing the technical and economic viability of projects. But in applying these procedures there is scope for differentiating between projects of varying size, as follows: Category A: Projects with a total estimated investment in fixed assets including land, building, machinery and equip- ment of Af 50 million or more. Category B: Projects with a total estimated investment in fixed assets including land, building, machinery and equip- ment of less than Af 50 million. Category C: Small-scale industry projects with a total estimated investment in machinery and equipment alone of less than Af 4 million. For projects of Category A, the current procedure should continue. For proj- ects of Category B, a simplified procedure which telescopes the stages of the present system into a single stage, should be adopted. For projects in Category C, approval by IDBA under its DAF facilities should be final and not require the current procedure of referral to the Private Investment Committee, and should automatically confer FDPIL privileges on the borrower (see para. 5.27). 5.41 As regards the regulations governing the award of FDPIL privileges, it should be stipulated that a company wishing to effect changes in its opera- tions as against the terms of its original FDPIL submission (e.g., a change in raw material inputs, or in the ratio of home market to export output), should inform the Private Investment Promotion Department of this. If the change would imply no increase or an increase of up to say 10 percent in the scale of operations, the Department should be permitted to approve directly. Otherwise, they would be subject to the procedures for either Category A or Category B above, depending on the changes proposed. If no objection is received within, say, 60 days, the change should be assumed to be acceptable. Only if the Department and the investor are unable to agree, should the matter go to the Investment Committee. As regards other conditions of the FDPIL, exceptions should be permitted to the requirement that the maximum permissible foreign shareholding is 49 percent for export-oriented projects or those which introduce new or complex technologies. The limit on equity participa- tion is a considerable deterrent to foreign private enterprise since manage- ment control is lost in the process. This is of major importance in view of the limited technical and managerial know-how of domestic investors. - 120 - 5.42 Afghanistan's scarcity of qualified technicians and managers deserves further government attention. With regard to projects under Category C in the preceding paragraph the establishment of the DAF facility which envisages close involvement of IDBA officials in the conception and execution of projects will go some way towards meeting the need. For projects under categories A and B a different institutional arrangement has to be conceived. IDBA has proposed the establishment of an industrial consultancy organization capable of preparing and evaluating feasibiity studies which would be a useful step in this regard. The setting up of an accountancy institute which will provide contract services to both private and public sectors (see para. 6.37) could also make an impor- tant contribution. The above measures would, however, have to be supported by a policy of upgrading the country's educational facilities for technical and managerial manpower. Apart from greater emphasis on engineering and science education in the university and technical schools, the establishment in late 1977 of the Afghan Institute of Management could fill part of the vast gap in administrative and managerial training. Although it will mainly serve the needs of the public sector, the Institute will also accept trainees from the private sector. 5.43 The ambitious plan projections for private industrial investment in the next seven years, imply a climate and policy framework quite different from what exists at present. Even if the necessary changes are made it will be difficult to achieve the targets for private industry. Indeed the changes need to be made not because of the increase in production during the Plan period, but because of the development of entrepreneurial, managerial and technical skills which would result and the longer-term benefits which would flow from this, benefits which may prove as important for the public sector as for the private sector itself. The past evolution of private industry in Afghanistan, characterized as it was by the dominance of Bank-i-Melli and the sherkats established by it, and inevitably the inordinate political influence of those associated with it, have colored present attitudes to the private sector in Afghanistan. It is time for Afghanistan to free itself from the shadows of the past and to recognize that the private sector has a useful contribution to make - never more than at this stage of the country's develop- ment where the potentials created by agricultural surpluses and the growing export markets in neighboring countries, lend themselves ideally to the scale and flexibility of private operations. - 121 - VI. STATE ENTERPRISE IN INDUSTRY AND MINING A. Background and Characteristics 6.01 In Chapter II we described the beginnings of industrialization in Afghanistan in the 1930's through the pioneering efforts of Bank-i-Melli which by the end of the decade had established joint-stock companies for cotton gin- ning, cotton textiles, edible oil extraction and sugar refining. These efforts had the patronage and support of the Government through minority equity partic- ipation and the award of monopoly concessions. Despite these, industrial development had not proceeded very far by the 1950's and there was impatience with the pace of private investment. As a result, the Government of Prime Minister Daoud set up, with foreign aid and technical assistance, a number of wholly state owned and operated enterprises, producing textiles, cement, sugar and metal products. Public sector expenditures on industry and mining increased from virtually zero to Af 2.6 billion during the First Plan period (1957/58-1961/62) and to Af 8.4 billion during the Second Plan period (1962/63- 1966/67). By the mid-sixties the pendulum had swung back. The state enter- prises were not regarded as successes. There was general agreement that they were poorly managed and there was a substantial fiscal drain on their account. As a result there was an attempt to promote private investment through the formulation of a generous program of incentives under the Foreign and Domestic Private Investment Law of 1967 (see para. 5.13). There was promising initial response to the publication of the law. 6.02 The coming of the Republican Government in 1973, however, marked a revival of the etatist policies of the 1950's. The banks were nationalized and in the process the Government acquired majority shareholdings in the large- scale private sector industries which were subsidiaries of Bank-i-Melli. The effect of this was to bring almost all large-scale industry into the public sector, representing the majority of industrial investment though not of out- put and employment. The public sector is now once again seen as the medium of Afghanistan's industrialization. The provision for private sector industrial investment during the present Seven-Year Plan period is Af 8.5 billion (about $180 million), compared to Af 45.8 billion in the public sector (about $1 billion). More important, as pointed out in Chapter V, even the lower allo- cation for private industry is merely notional, and unlikely to be realized if current investment trends continue. Table 23 shows the acceleration of public industrial investment implied by the Plan. - 122 - Table 23: INVESTMENT IN STATE ENTERPRISES, 1957/58 to 1975/76 (In billion afghanis, at current prices unless otherwise specified) First Second Third Annual Seven-Year Plan Plan Plan Plans Plan /b 1957/58- 1962/63- 1967/68- 1972/73- 1976/77- 1961/62 1966/67 1971/72 1975/76 /a 1982/83 Industry .. .. 5.5 1.8 37.8 Mining .. .. 3.7 5.4 /c 8.0 Total 2.6 8.4 9.2 7.2 45.8 Note: The subsector breakdowns up to the Second Five-Year Plan are not avail- able. The investments were, however, mainly in industries. /a The component for 1975/76 is an estimate. /b At 1975/76 prices. /c Includes the Mazar-i-Sharif Fertilizer Plant. Source: Ministry of Planning, Kabul. 6.03 The most important public sector industries are those based on cot- ton (ginning, oil products and cotton textiles): Afghan Textile's three factories Bagrami Textile, Balkh Textile, and Spinzar Cotton-ginning; Balkh Ginning, Pressing and Oil; and Helmand Cotton and Oil. Other major sectors are construction materials (Ghori Cement, and the prefabricated concrete plant), urea fertilizer, and sugar. The public sector produces all of Afghanistan's cement, fertilizer, ginned cotton and sugar and a significant part of the textiles. The emphasis is on import substitution with the excep- tion of ginned cotton; cement and fertilizer have been exported in the past in minor quantities but domestic consumption has already caught up with existing capacities. Textiles are produced entirely for the domestic market; there is at present a ban on exports of textiles. The public sector, indeed the country, has hardly any production facilities for capital goods and the needs are met through imports. The Jangalak Ironworks which currently under- takes production of spare parts, metal fabrication and metal furniture on a limited scale, is the only exception. 6.04 Since 1973 there has been a noticeable improvement in the degree of capacity utilization among the public sector industrial enterprises. This has risen to about 70 percent and above in many cases. This contrasts sharply with the situation a few years ago, particularly in cotton ginning. The ris- ing production of seed cotton and buoyant export demand has largely eliminated excess capacity and indeed substantial expansion in capacities will be neces- sary. In fertilizer, the capacity limits are likely to be reached during the current year while cement production is already at the capacity level. Capac- ity utilization in textiles could improve further but for the export ban. There are exceptions though, the most prominent one being the sugar factory, - 123 - where capacity utilization is low because of machine obsolescense and inade- quate maintenance. Another type of technical problem frequently encountered is raw materials of improper specifications leading to breakdowns. Other cases of low capacity utilization are traceable to managerial and administra- tive deficiencies though here also there has been some improvement in the recent past. 6.05 The mining sector in Afghanistan is entirely within the state sector and private enterprise is legally barred from participation. Its origin is still more recent than the industries: indeed, there was no systematic attempt to exploit the country's mineral resources until the 1950's. Afghanistan's mineral resources offer the potential for considerable future development. The Government has rightly resisted the temptation, hitherto, to jump into major mineral exploitation projects without the survey and feasibility work which are needed to establish their viability. A stage has now been reached where intensive studies must be mounted so that decisions can be taken on the selection of projects and their phasing. 6.06 Afghanistan has about 100 million tons in proven coal reserves with another 400 million tons in the probable category. Domestic consumption is less than 0.2 million tons per annum at present, most of it in thermal power plants, while about 15 percent is used in the form of briquettes for household purposes. It is only recently that the existence of such vast coal reserves has been proven which explains the massive degree of underexploitation. As for hydrocarbons, natural gas reserves are estimated at about 120 billion cubic meters. Current production is about 2.5 billion cubic meters of which about 80 percent is exported by pipeline to the USSR, and the rest utilized in the fertilizer and thermal power plants in the north of the country. The country has small deposits of fuel oil, current proven reserves are about 10 million tons. There is no domestic refinery and the entire annual consumption of fuel oil and lubricants is imported at a cost of about $28 million. 6.07 Aside from energy resources, Afghanistan has two major mineral re- sources, iron ore and copper, which have not yet been exploited. The iron ore deposits are estimated at about 1.7 billion tons (about 62 percent grading). Exploitation possibilities are, however, limited by the inaccessibility of the area where the deposits are located (Hajigak in the Koh-i-Baba range at heights of over 12,000 feet), the lack of a domestic market and the distance the ore will have to be transported for export purposes. The Government has recently initiated a series of detailed technical and economic studies on Hajigak iron ore. As regards copper, the deposits at Ainak are estimated at about 4.7 million tons of metal (ore equivalent of about 280 million tons) and offer good medium-term possibilities for export either in ore concentrate or in metal form. Apart from the above, Afghanistan has several minor mineral deposits of chromite, lead, zinc, talc, barite, rock salt, etc., and precious and semi-precious stones. There is exploitation of some of these,deposits, but the total output is low. - 124 - B. Management of State Enterprises 6.08 State enterprises in industry and mining are divisible into three types of management arrangements: enterprises that are organized as depart-. ments of ministries; Tasadys (i.e. semi-autonomous enterprises fully owned by the Government); and majority shareholdings by organizations which are them- selves under government control. The differences in government control proce- dures are less marked in practice than in principle. With the exception of Afghan Textiles which controls 3 major formerly privately-owned cotton textile plants, all other enterprises are closely managed by the controlling ministry with all major decisions requiring ministerial approval. Afghan Textiles con- stitutes an exception and operationally it remains essentially as it was under private eneerprise, Government intervention being limited to broad policy ques- tions. 6.09 The only important industrial enterprises which form part of a Ministry and operate as a branch of the government service, are the fertil- izer factory and thermal power plant at Mazar-i-Sharif; these are part of the Ministry of Mines and Industries. All mineral enterprises are run by the Mineral Exploitation Department of this Ministry. The largest group of state enterprises are the Tasadys. Altogether there are 41 of these at present, falling under 10 different ministries. All report to the Ministry of Finance on budgets and accounts. However, only about 11 of these are clearly indus- trial enterprises, 10 of them under the Ministry of Mines and Industry, and one (the prefabricated housing unit factory) under the Ministry of Public Works. Six of the remainder are partly industrial in character. The largest single manufacturing company in Afghanistan -- Afghan Textiles -- is control- led by Bank-i-Melli, which, following nationalization, has itself come under government control. Afghan Textiles is the majority shareholder in the Spinzar Company at Kunduz and Jangalak Ironworks. 6.10 The management of state enterprises in Afghanistan is characterized by an extraordinary degree of centralization as provided for under the revised Law of Tasadys. 1/ Each Tasady is headed by an Amir (in law the Minister con- cerned), who determines policy, approves annual plans and budgets, supervises internal management and appoints all staff except the most junior ranks. The charter of each Tasady will specify whether control is to vest with the Minister or with the 'High Council' under his chairmanship. The management, headed by an official with the rank of President, is therefore essentially the executive arm of the Minister. In addition, the Tasadys are also characterized by two other kinds of rigid centralized controls: (i) plant management is required to refer all major purchases (i.e., between US$3,500 to US$9,000 depending on the plant) to the Minister for approval; and (ii) prices and mark-ups are decided by the Minister. The need for such extensive authorization deters Management 1/ The revision of the Tasady law was promulgated in late 1977. While its overall objective is improved management, the emphasis on centralized control may exacerbate the deficiencies which were present under the original law. For a detailed treatment of the management of the public sector enterprises: see IBRD Report No. 1245-AF, Chapter IV. - 125 - from acting in a genuinely managerial capacity; many of these managers regard themselves as not having any real responsibility either for the immediate viability of the enterprise or for its long-term development. Government determination of the pricing policies of enterprises has led to a situation where it is impossible for some enterprises to make profits on home market sales. The effect of the system of control of Tasadys is that it opens up a gap in the management of the enterprises. The Minister cannot devote the time necessary to control operations in detail, senior officials in Ministries lack both the authority and staff resources to do so, and plant managers are either unwilling to or incapable of performing broader management functions. 6.11 The management control of other types of state enterprises is almost equally centralized except in case of the Afghan Textiles where, as noted above, Government authority is, as of now, limited to policy matters. In all other enterprises, the degree of centralization is almost as complete as in the Tasadys. This is particularly true for the mining enterprises run by the Department of Mineral Exploitation in the Ministry of Mines and Industries. These enterprises are run as sub-departments, subject to full bureaucratic procedures. Despite the system of centralized control, public sector enter- prises operating in the same industry function as individual units, rather than as a coordinated whole. This is most obviously the case in cotton tex- tiles, where state enterprises are in direct competition for markets with one another, with private enterprise, and with imports. 6.12 A particular deficiency of the management of state enterprises is the personnel policy. The salary structure is the same as that of the civil service which has hardly changed during the last decade. Promotion is on seniority and exceptions are rare and do not correlate with initiative and enterprise. The result has been, therefore, a corps of managers who lack motivation, and are understandably unwilling to take initiative. 6.13 The majority of the state enterprises claim to make profits. Thus in 1976/77 the state enterprises are estimated to have made a net profit of about Af 577 million. 1/ However, it is appropriate to regard this only as operating surpluses since deductions which should be made in the calculation of net profits are not made in the accounting practices of state enterprises in Afghanistan. First, there are no adjustments for debt servicing. Taking an arbitrary interest rate of 8 percent on just the easily identifiable debt, around Af 200 million per annum should probably be deducted from the above figure. Second, depreciation rates are low, typically 6 to 8 percent for machinery and 2 percent for buildings, and book values are not adjusted for inflation. Third, a part of the above figures are gross receipts and ignore even the operating costs of the enterprises concerned. The mission spent a great deal of time without success, trying to establish consistent definitions of the net loss of the public sector. While it did not prove possible to do this, it seemed clear from the analysis which was done, that every state 1/ Excluding the sugar and petroleum monopolies, which are deficit enter- prises, and mining enterprises whose profitabilities are submerged in departmental budget the details of which are not available. - 126 - enterprise suffered a net loss according to proper financial accounting defini- tions, with the exception of Afghan textiles, the formerly private sector undertaking. 6.14 Apart from the lack of sufficient delegation of responsibility to the enterprise level, several other critical problems exist. Among these, a major problem area is the dearth of technical manpower, skilled plant managers and line supervisors. This problem will be considerably exacerbated if rapid investments are to take place. A recent quantitative assessment by the UNIDO of the manpower situation in the public enterprises suggests that present deficiencies and the expansions envisaged under the Plan will neces- sitate the following additional technical manpower: (a) 223 percent more engineers and high-level technical personnel; (b) 184 percent more middle-level technicians and foremen; and (c) 34 percent more skilled and unskilled workers. Current enrollments in the Kabul University Faculty of Engineering could meet the need for engineers and technologists though this will strain the Faculty's capacity to maintain its teaching standards. The availability of technicians and foremen is perhaps a bigger problem since plans for vocational training fall well short of these needs. The need for other skilled and unskilled workers is less pressing and should be met. 6.15 A far more serious current problem is, however, the shortage of Afghans trained in the skills of modern management, notably in accountancy and marketing, and with practical experience of the working of modern business enterprises. The problem is more grave because while there are a number of Afghans with technical training there are hardly any with training in manage- ment sciences so that even putting together a group of teachers in this field will be difficult. According to the UNIDO survey referred to in the previous paragraph the additional requirement for managerial staff during the plan period is 76 percent above the present availability. The present educational facilities are not adequate for this purpose. Until late 1977, the only relevant facilities were at the Institute of Industrial Management (current enrollment is about 60) which offers a general course below university first degree level and offers no opportunities for practical training. The estab- lishment of the Afghan Institute of Management (AIM) should go a long way towards filling this gap. 6.16 A closely related problem is in the accounting procedures employed and the lack of use of accounting as a management tool. Current procedures are severely deficient, not based on standard bookkeeping principles and have hardly any reference to modern cost accounting. For example, as pointed out above, depreciation rates are calculated on historic values with no inflation adjustment. Similar procedures are followed for the valuation of stocks. In addition, most enterprises have a large backlog of annual accounts (in many cases they are only now issuing accounts for 1973/74) which makes any estimate - 127 - of profitability or more important any attempt to exercise effective financial control, impossible. The supervising ministries do not enforce up-to-date annual financial statements, although these are required under the Law of Tasadys. Apart from procedural problems and lack of ministerial interest and insistence, the enterprises simply don't have the trained accounting personnel who could do the job properly. Remedial steps, therefore, have to be taken on two fronts: systems must be improved and adequate staff must be trained and hired. The Government is considering setting up an Accountancy Institute, but the modest initial scope of its activities would leave most enterprises in their present abysmal state in terms of financial management. C. Perspective for the Future: The Seven-Year Plan (1976/77-1982/83) 6.17 The First Seven-Year Plan's chapter on mines and industries offers a formal and detailed view of the government's medium-term perspective for mineral exploitation and the industrialization of Afghanistan. Its project composition however, has already undergone significant changes. In the absence of detailed project studies the Plan has been put together more as a list of possible projects. In discussions subsequent to the publication of the document, the Government has indicated that the program will be modified on the basis of detailed project feasibility studies and financial availabili- ties. The Plan envisages total public investment expenditure of about Af 36.0 billion (US$760 million) in 1975/76 prices for industrial development; includ- ing mining expenditure the total is Af 45.8 billion (US$970 million), repre- senting 26 percent of the entire public investment program of around Af 174 billion. Included in the Af 45.8 billion are carry-over projects amounting to Af 3.6 billion for industries and Af 6.3 billion for mining. At an average annual expenditure of Af 6.5 billion, the projected investments are nearly four times the annual volume achieved over the past four years. 6.18 The broad product composition of the investment program is described in Table 24 below. - 128 - Table 24: COMPOSITION OF PLAN INVESTMENTS IN THE INDUSTRY AND MINING SECTOR (in billion Af) Carry-over New Total A. Industry 1. Cotton a. Ginning - 2.5 2.5 b. Textiles 0.5 2.5 3.0 2. Woolen Textiles 0.1 0.4 0.5 3. Sugar - 6.2 6.2 4. Cement 3.6 3.6 5. Fertilizers 2.9 2.8 5.7 6. Machinery and Equipment - 1.7 1.7 7. Metallurgy - 9.7 9.7 8. Food Industries - 1.2 1.2 9. Other Chemicals - 0.4 0.4 10. Paper - 0.3 0.3 11. Others /a 0.1 1.1 1.2 B. Mining 12. Coal - 1.4 1.4 13. Others 6.3 2.1 8.4 Total 9.9 35.9 45.8 /a Mainly exploration and surveys. Source: The Plan, Annex, Table 13, pp. 69-80. The areas of concentration are metallurgy (21.2 percent), cotton ginning and cotton textiles (12.0 percent), sugar (13.5 percent), fertilizers (12.4 per- cent), cement (7.9 percent) and food industries (4.8 percent). Details on project composition are shown in Vol. II Table 8.3 while the estimated physical capacity increases are shown in Table 25 below. 6.19 A few of the projects to be undertaken during the present plan period would extend into subsequent plan periods. Of major importance is the metal- lurgical subsector for which an investment of Af 72.3 billion (US$1.5 billion) is projected during the present and the next (i.e. 1983/84 to 1989/90) plan periods, mainly for the Hajigak iron and steel and Ainak copper smelting plants. These very large projects are indeed only at a preliminary stage and have not progressed beyond partial geological surveys and preliminary proposals to project content. 6.20 Large capacity expansions are envisaged in the main industrial sub- sectors. These are shown in Table 25 below. - 129 - Table 25: ANNUAL CAPACITY IN MAJOR PUBLIC SECTOR INDUSTRIES AND MINING; SEVEN-YEAR PLAN Increase Year ended March 20 1975/6 1982/3 _ % A. Industry 1. Cotton a. Ginning (1,000 tons) 47 106 125.5 b. Textiles (million meters) 65 159 144.6 2. Woolen textiles (1,000 meters) 350 /a 1,481 323.1 3. Sugar (1,000 tons) 14 81 478.6 4. Cement (1,000 tons) 166 858 416.9 5. Petroleum refining (1,000 tons) - 205 - 6. Fertilizers (1,000 tons) 105 105 - 7. Metallurgy /b - - - B. Mining 8. Coal (1,000 tons) 145 520 258.6 9. Natural Gas (billion cubic meters) 3 3.4 13.3 /a Total installed capacity is 600,000 meters. The figure above repre- sents the current capacity utilization limit. /b Refers to copper, iron ore and steel-making; the incremental capacity of these are not planned to come on stream before late 1980's. Source: The Plan, Annex, Table 13, pp. 69-80. Cotton ginning and textiles are planned to more than double their output while woolen textiles are planned to more than treble their output. In the case of ginned cotton the aim is for a major expansion in exports while the increases in cotton and woolen textiles are meant to assure self-sufficiency in domestic consumption. The planned increases in sugar production will substitute the current import demand of about 50,000 tons as well as a part of the incremental demand. About 16,000 tons of sugar imports are still foreseen in 1982/83. A major capacity expansion is planned for cement. The Plan foresaw a good deal of this going into export but the recent surge in demand for cement suggests that for the most part it will be domestically consumed. Afghanistan has no current petroleum refining capacity and there are plans for a refinery of about 0.5 million tons (the original Plan proposal was 0.21 million tons). Imports of refined petroleum products, however, are still planned to increase to about 0.40 million tons compared to about 0.26 million tons at present. A second urea fertilizer plant is envisaged with an estimated capacity of about 0.3 million tons, but it will not come on stream until 1985. Meanwhile, imports of urea are likely to increase from zero in 1975/76 to about 123,000 tons in 1982/83. Similarly, in copper and steel, none of the proposed invest- ments are due to start operations before 1985. Coal mining is scheduled for a major expansion. Natural gas output will be higher due to the second field at Jaraqdak coming on stream. - 130 - 6.21 What are the elements of the industrial development strategy as it emerges from the Plan allocations? First, about 22 percent of the Plan's total investment in industries and mining is earmarked for carry-over projects. The prior expenditures on these projects were about Af 12.0 billion compared to about Af 9.9 billion projected during the present plan period. There are no glaring examples of uneconomic carry-over projects and the priority given to their completion is well-deserved. Secondly, the plan emphasizes utiliza- tion of the domestic raw materials' base. Thus about 75 percent of the pro- posed investments are based on local products such as cotton, sugar beet and sugar cane, livestock, limestone, iron ore, copper, gas, petroleum, coal, etc. There is a major emphasis on import substitution in consumer goods and inter- mediate goods (e.g. cotton and woolen textiles, sugar, petroleum, cement, fertilizer, paper, edible oil, etc.). About 65 percent of the total invest- ments is directed at import substitution. There are also a number of export- oriented projects; these include the copper and steel mills and some of the cotton ginning capacity; roughly about 25 percent of the investments could be classified in this category. (The classification of the remaining 10 percent is ambiguous.) A similar proportion of investments is envisaged for relatively advanced technology and capital intensive projects (such as the copper smelter, steelmaking through a gas reduction process, a second fertilizer plant, oil refinery, etc.). Roughly 10 percent of investments are intended for balancing and modernization (e.g., power turbine at the existing fertilizer plant, a gas desulphurization plant, replacement of existing machinery at the Baghlan sugar plant, etc.). D. Identifying an Appropriate Industrial Investment Strategy 6.22 The investment plans for industries and mining are clearly seen by the Government as the fulcrum of Afghanistan's medium term growth aspirations. Thus the Plan states that 'rapid growth in this sector is spearhead of all of its economic policies'. It embodies the Government's hopes for rapid modern- ization of the economy, and for freedom from resource constraints in the longer term through the pay-off from investments in major metallurgical proj- ects (e.g. steel and copper). It is clear from the Plan that the state sector is seen as the main instrument in the development of industries and mining and the private sector is relegated to a minor supporting role. 6.23 The investment pattern implied by the Plan seems broadly reasonable. It is rooted in the resource endowment of the country and addresses the objec- tives of import substitution and export expansion. The main problems are not the direction, but the scale of capacity expansion in the medium term. The emerging financial resource constraint, both domestic and external will require some reassessment of medium-term possibilities (i.e., the current Seven-Year Plan period). This constraint should encourage some shifting towards less capital-intensive, shorter gestation projects. Among other considerations, the country's shortage of technical manpower may require a choice of less advanced and more intermediate technological production processes than are currently envisaged. 6.24 It is possible to identify the broad features of a revised program for industries and mining which might emerge after a re-evaluation of the Plan projects. In cotton textiles, the aim is complete self-sufficiency, thus - 131 - eliminating current imports. Afghanistan today lacks an adequate import con- trol system nor is it likely that such a system could be instituted in the near future. Consequently, a significant volume of imports for reasons of "product differentiation", as well as smuggled imports as a vehicle of capital flight from neighboring countries, has to be reckoned with. The Plan program is to raise the current (1977) public sector capacity from 85 million meters to 159 million meters. There are at present 16 million meters of private sector capacity and 50 million meters of imports not counting any illegal import flow. The Government proposal is to eliminate imports by 1982/83. If this were done, on the basis of the planned capacity expansion, annual per capita availability in 1982/83 would increase from the estimated present level of about 8 meters to about 10 meters. This would imply a growth rate of con- sumption of about 3 percent per annum, i.e. rather less than GNP growth. In these circumstances pressure to import is likely to continue and it would seem more appropriate to compensate for imports by developing exports of cheap textiles to Iran in particular. Capacity expansion could be related to success in exporting. This will require a change in the Government attitude to exports of cotton textiles. These are banned at present in order to keep domestic textile prices low. 6.25 With respect to cotton ginning, it is proposed to expand capacity from the present 47,000 tons to 106,000 tons 1/ by 1982/83. The utilization of this capacity will depend on the success of the cotton production program. The Plan is predicated on domestic production of seed cotton of about 350,000 tons. This is shown in Table 26 below. Table 26: PRODUCTION CAPACITY IN GINNED COTTON ('000 tons) 1975/76 1982/83 Increase (%) Installed Capacity 58 125 116 Utilizable Capacity 47 106 130 Seed Cotton Equivalent 160 350 119 As shown in Table 19 in Chapter IV, the limit of production in 1982/83 may be about 300,000 tons of cotton. However, within two years after that a substan- tial increase to 400,000 tons is projected, so that, given normal implementa- tion delays, the expansion of ginning capacity may prove reasonable. Annual plans should obviously take account of the success of the cotton program to determine the phasing of investments in new ginning capacity. 6.26 The same considerations apply in the case of sugar. The estimated increase in production of 67,000 tons has been envisaged as follows: (i) replacement of existing machinery at Baghlan (annual capacity 14,000 tons) 1/ Current utilization ratio is at about 80 percent, to rise to 85 percent by 1982/83. - 132 - as well as expansion in capacity to. 27,000 tons per annum; (ii) establishment of a sugar factory at Herat with annual capacity of 24,000 tons; and (iii) replacement of the present machinery at Jalalabad sugar factory (capacity 1,000 tons annually) plus additional capacity of 30,000 tons. In each case, the crucial variable is the required increase in the raw material production, sugar beet in Baghlan and Herat and sugar cane in Jalalabad and all that it implies in terms of shifts of acreage, irrigation, supply of fertilizer and extension services, and relative prices of agricultural products. The Baghlan and Herat sugar plants would require around 180,000 and 160,000 tons of sugar beet respectively. This would require a 160 percent increase in output in the Baghlan area. No sugar beet is currently grown in the Herat area except for a small experimental plot and the viability of the proposed investment is depen- dent on irrigation facilities following the construction of the Salma Dam on the Hari Rud River; a firm schedule for this is lacking. Finally, for the Jalalabad sugar factory, the requirement of cane is around 300,000 tons. Such increases in output are possible, but there is little realistic likelihood of their being achieved in the medium term. 6.27 With regard to cement, both the two major plants, at Herat (210,000 tons) and at Kandahar (480,000 tons) seem to make good sense. These were ori- ginally envisaged as export-oriented projects. Unfortunately, both the plants will be substantially delayed; on current schedules, the Herat plant is not expected to come on stream before 1982/83 while the Kandahar plant could be delayed till the mid-1980's. As a result the current acute scarcities 1/ will persist and a rapidly expanding volume of imports until 1982/83 will have to be planned for. It is unlikely that the 1982/83 volume of consumption pro- jected in the Plan will be attained, but a substantial increase would still occur. Assuming about a one-third shortfall in the Plan's projected develop- ment expenditures, a consumption volume of 340,000 tons in 1982/83 could be estimated. The implicit consumption elasticity with respect to the GNP growth rate projected by the mission (see Table 77) is about 1.8, rather high but a plausible coefficient given the heavy incidence of construction activi- ties in Afghanistan's development expenditures. The combined existing and likely incremental capacity could be about 370,000 tons by the end of the Plan period so that a small surplus, about 30,000 tons, could be envisaged by 1982/83, as inventories for consumption in the following years. Meanwhile, in the years prior to 1982/83, a rapidly expanding volume of imports will be necessary. Over the years 1977/78 to 1981/82, this aggregate volume is estimated at about 400,000 tons. The projected production and consumption of cement during the Plan period is shown in Table 27 below. 1/ There is flourishing black market in cement today with a 50 percent premium being paid over the fixed price. - 133 - Table 27: PRODUCTION CONSUMPTION AND EXPORTS OF CEMENT ('000 tons) Increase (%), 1975/76- 1975/76 1977/78 1982/83 1982/83 Seven Year Plan: Production 166 - 858 417 Consumption 136 - 465 242 Exports 30 - 393 1,210 Past Estimates and Revised Projections: Production 147 160 370 152 Consumption 132 200 340 158 Imports ( +15 -40 - - Exports (- Inventory - - 30 - Source: Ministry of Planning, Kabul, and mission estimates. For the years subsequent to the present Plan period (i.e., post 1982/83), the Kandahar cement plant which is projected to come on stream by the mid-1980's would meet increased domestic consumption and permit a sizeable exportable surplus till 1990. 6.28 With regard to chemicals, the Plan proposes the construction of a desulphurization plant and a second urea fertilizer plant. The proposed pro- vision of a gas power turbine for the present fertilizer plan needs further study. The use of gas as an energy source has to be seen in the context of a national energy development plan and may well prove a less efficient use of gas in the light of the country's vast coal reserves. The proposed caustic soda plant also needs study. The volume of present and future domestic demand (currently about 5,000 tons) seems too low to sustain the minimum feasible capacity level of 20,000 tons. The residual could probably not be absorbed by exports because of prohibitive transport costs. 6.29 The Plan allocates about Af 7.3 billion (about US$153 million) to the development of energy resources. This is about 16 percent of the total investment in industries and mining. Of this about Af 5.9 billion (about US$124 million) is for exploration and exploitation of gas and petroleum; the residual is for the survey and exploitation of coal. There is little to dis- pute as to the need for continued exploration of gas and petroleum reserves. Afghanistan now has about 120 billion cubic meters of gas reserves with yearly offtake of about 3 billion cubic meters. It is a major export item (about US$40 million) and its demise from that position, as seems likely with the - 134 - increase in domestic use during the next decade, will severely affect foreign exchange earnings. Petroleum, on the other hand, is a major import, currently about US$30 million for 260,000 tons and could very easily double in volume by 1982/83. Domestic reserves are about 12 million tons and it is proposed to set up a refinery of 500,000 tons to exploit these reserves by 1982/83. There has been little progress so far in setting up the refinery and more urgency in this regard could be well justified. 6.30 The Plan does not have an adequate program for the development of a potentially major energy source - coal. Of the proposed increase in power generating capacity from 341 mw to 775 mw, about 40 percent is to come from thermal plants. However, the entire incremental thermal capacity is to be based on gas, in competition with its possible use for exports and fertilizer production. There is a need for study and planning of the optimal use of Afghanistan's natural gas resources. With respect to other energy sources, hydel power and diesel are to contribute about 55 percent and 5 percent respectively of the incremental generating capacity. However, the possibil- ities for hydel power generation are reduced by the conflicting demands for irrigation and power generation, starkly demonstrated by the Kajakai Dam 1/, while diesel will have to be imported. Despite development of domestic petro- leum sources, domestic production will be able to meet only about one-third of the projected 1982/83 demand. The investment pattern in the power sector delineated above, contrasts sharply with the proven reserves of at least 100 million tons of high-grade coal in the Dare Sauf mines alone. Counting other areas, the proven reserves could amount to over 430 million tons. Total investment proposed in the three coal mining areas (e.g. Dare Sauf, Sabzak and Karkar) is about Af 1.4 billion (about US$30 million) and except for the out- put from the smallest mine, Karkar, output from the other two are not expected before the end of the plan period. There seems to be a lack of coordination between the mining and energy authorities. A program should be prepared for. the development of the coal mines and the use of coal in power generation. 6.31 The Plan's strategy for the development of metallurgical projects, e.g., Hajigak iron ore and steel complex, and the Ainak copper smelter is also open to doubt. Roughly 21 percent of the investment in industries and mining have estimated completion dates towards the end of the next Seven-Year Plan period (i.e. the late 1980s). Of these, the Hajigak complex is predicated on the building of a rail-link with eastern Iran, the feasibility and finance for which are both very uncertain. The necessary pre-investment studies on tech- nical and economic aspects have not been started. Admittedly, the amount (Af 3.4 billion) allocated for Hajigak in this plan period 2/ does not set 1/ The current proposal for building additional reservoir capacity at Kajakai for power generation would mean an undermining of its irrigation poten- tial. The irrigation needs are seasonal while water in the reservoir has to be conserved for the perennial needs of power generation. 2/ The total project costs excluding the rail-link have been estimated as Af 38 billion in 1975/76 prices. - 135 - Afghanistan irrevocably towards the project but it is certainly too large to commit without a careful examination of the project's viability. Realistic- ally, the completion of the pre-investment studies is what should be aimed at during the present Seven-Year Plan, and even these should be linked to the status of the rail-link, which remains the key constraint. The situation is somewhat different in the case of the Ainak copper project. Unlike the Hajigak complex it is not predicated on the building of a supporting transportation network. According to a recently completed UNDP survey the present road-rail link to Karachi is adequate for the transportation of ore concentrate and refined copper. On the basis of preliminary considerations, the UNDP report suggests 0.15 million tons of metal or about 0.4 million tons of ore concen- trate per annum as a viable production possibility for export by mid-1980s. In 1976 this would have been valued at about $230 million. The net margin on sales (i.e., after allowing for transportation and other current costs) would still be about 52 percent of the above. The export prospects for copper are discussed in para. 12.17. 6.32 The public investment program covers a wide range of products in which the private sector has demonstrated considerable aptitude and investor interest in the past. Textiles constitute a major area in which the private sector has significant experience and which, despite many disincentives, still attracts considerable private investor interest. The proposed tanneries at Ghazni and Herat could also be similarly cited, particularly because the state sector is devoid of previous experience in this area. The private sector not only operates the only tannery in the country, but also has established market links in Western Europe. Food industries are yet another example. The Plan seeks to establish three large public bakeries involving modern capital- intensive processes for the urban areas and the armed services. These bakeries constitute a particular case of misplaced emphasis. Currently the country's needs are met by numerous regionally dispersed small bakeries catering to local tastes, using traditional skills, and generating a significant volume of employment. 1/ 6.33 Serious thought should be given to re-allocating some of the smaller public sector projects listed in the Plan to the private sector. This category would include the three bakeries, the tanneries at Herat and Ghazni, the glass manufacturing and chinaware, the starch plants, and the plant for plastic bags for use in packing fertilizer. The failure to do this highlights one of the great weaknesses of the Plan - the lack of integration of industrial sector planning. In the long-term Afghanistan must try to develop a balanced indus- trial structure in which units of different size work together. With the limited size of the domestic market and the natural protection provided by high transport costs, there will be many areas in which small-scale private production is economic. The public sector should not merely tolerate, but indeed foster the development of such industries through sub-contracting and technical support. Instead public sector industry in Afghanistan appears 1/ See Volume II Table 8.5, for a description of other promising private investment possibilities. - 136 - to have been conceived as an enclave, often with large projects with little employment impact, in some cases with their entire output exported. It is rather curious that these are exactly the kinds of projects which colonial powers undertook in many developing societies in the past, and which had such little demonstrable effect on the living standards of the population. Policy- makers in Afghanistan should not be hasty in developing some of the country's exhaustible resources in this fashion. 6.34 What is needed is the delineation of a "core" plan which focusses on the critical elements of the present industrial investment program. The preceding discussion suggests appropriate changes in the program as follows: (a) A shift in the 15,000 ton cotton ginnery and the 40 million meter textile plant proposed near the end of the Plan cycle for the Kunduz area. Some of the shortfall in textile output would be taken up by the private sector, while the ginning capacity would simply come onstream two years later, in line with cot- ton production projections. (b) Neither the Herat, nor the Jalalabad sugar mill seems a realistic prospect until far later in the Plan than is currently projected. (c) It would seem wise to defer any major expenditures on the Hajigak iron and steel complex to the next plan period. (d) Some of the smaller public investments (the tannery, bakeries, etc.) cited in para. 6.33 should be deleted and promoted in the private sector instead. This would not require any increase in the private sector allocation, but would merely'mean that there is a possibility of achieving the target, instead of a certainty of a substantial shortfall. (e) The proposed Plan expenditures on coal should be increased to permit its development as an energy source. A doubling of the Plan figure would not seem over-ambitious given the potential. The implica- tion of these proposed changes would'be an overall figure of about Af 30 bil- lion of investment in state enterprise during the Plan, as compared to the figure of Af 45.7 billion at present. This would seem to be more in line both with foreign aid expectations and also Afghanistan's absorptive capacity, in view of the steps which need to be taken to upgrade the technical and manage- rial capacity of the state enterprise sector. E. Improving Public Sector Management and Planning 6.35 Even if recognition is given to the potential role of the private sector, the main responsibility by far for Afghanistan's industrial develop- ment will still belong to the public sector. Public sector management at pre- sent is inadequate. The planned expansion is likely to expose even further the seriousness of the situation. One of the basic problems which would be exacerbated is that of the system of organizational control under which the present state enterprises operate. While it would be premature to suggest the details of the necessary reorganization which should be the subject of a sepa- rate study, the guiding principle can, nevertheless, be stated. This would be to free the state enterprises from the system of control associated with the Law of Tasadys and to provide an organizational setting in which they can operate with a greater degree of management responsibility and improve the efficiency of their operations. Under the general supervision of the relevant ministry, state enterprise management should have direct responsibility for: - 137 - (a) supervision and coordination of plant operations; (b) marketing; (c) preparation of periodic (monthly/quarterly) operational manage- ment information and annual financial accounts; (d) financial management and profitability; (e) staffing, except for chief executives and directors. 6.36 Among others, one organizational form that could be considered for some industry groups would be a system of state holding corporations. Admit- tedly, the experience with such an arrangement varies from country to country and will have to be studied closely in the context of Afghanistan. Whatever structure is chosen will not succeed if the present Law of Tasadys is retained, however. 6.37 As stated earlier, accounting methods are not used as a tool of man- agement control in state enterprises in Afghanistan. The problems here are deficient procedures and inadequate personnel. A viable partial solution to these would be to set up an autonomous accountancy institute which will under- take procedural reforms and training of personnel as well as prepare, on con- tract, enterprise accounts. It could be set up under the IDBA which has a nucleus of trained accounting personnel and continuing training program. At the same time, the supervising ministries should enforce the requirement under the present Law of Tasadys, of submission of outstanding annual accounts. Where it is not possible to submit accounts in the prescribed form, provi- sional accounts should be submitted. Given the poor availability of account- ing skills in the country and the immediate need to shake up enterprise man- agement, the emphasis should be on profit and loss statements rather than on full reconciliation including revaluation of assets. It might also be advis- able to forget about accounts prior to 1975/76 -- many enterprises are still slaving over the preparation of accounts for much earlier years with no possible policy significance at this time. 6.38 To fill the widespread need for trained management personnel, the Government has taken measures in late 1977 set up the Afghan Institute of Management (AIM) which will provide degree-level courses in management sciences including accounting and financial control. As noted in paragraph 6.15, the facilities at the existing Institute of Industrial Management are grossly inadequate for this purpose and the substantial upgrading envisaged in setting up the AIM, is timely. The facilities of the AIM will be complemented by the proposed UNDP-financed Institute of Planning and Administration. 6.39 Finally, a new arrangement should be instituted for industrial plan- ning. Presently, the responsibilities are divided between the Ministry of Planning and Ministry of Mines and Industries with very little coordination between the two. This has resulted in the overlooking of crucial macro- economic considerations such as supply and demand consistencies and the inte- grated planning of private and public industry. A move away from this would - 138 - be to set up a central institution, an Industrial Planning Unit in the Ministry of Mines and Industries which would have statutory control over the most impor- tant state industrial and mining enterprises and also encompass the promotion of private investment. This unit could build on the work already done by the UNIDO Industrial Services Project. Its functions could include identification of potential projects, preparation of pre-feasibility studies, coordination of investment plans of state industrial and mining enterprises, and the promotion of private investment in concert with the public investment program. 6.40 There is nothing new in these recommendations. Report after report on Afghanistan has stressed the need for improving the management of the public sector. Nor is there a shortage of sensible proposals as to what to do. The Government has not disputed the need for action. Yet little seems to be happening. The recent revision of the Law of Tasady was little more than tinkering without attempting the fundamental changes which are required. The time for complacency has passed. If the Government proposes to go ahead with an investment program in state-run industry of the scale which is in the Plan, then it is essential that the establishment of a proper management structure be given priority. There seems to be a lack of perception in Afghanistan as to the critical role which proper financial accounting has to play in this process. The reiteration by advisers that such accounts are necessary is often greeted by officials with the reaction that physical output is a per- fectly good tool for exercising ministerial control over plant management. This is the kind of philosophy which will lead to a continuing drain on budgetary resources for the state enterprises, though of course the inadequacy of the budgetary procedures makes it impossible to identify the costs precisely. Implementing proper financial procedures will give public officials objective standards on which to judge the operation of the enterprises and permit the delegation of management which is needed if state enterprise is to make an effective contribution to Afghanistan's future growth. - 139 - VII. PHYSICAL INFRASTRUCTURE 7.01 Physical infrastructure is the foundation for social and economic development. Transport and communication systems integrate the country both economically and socially, and allow the flow of goods, services and informa- tion. Farmers in previously inaccessible areas have the possibility of producing for markets, of specializing in production according to comparative advantage and importing many different goods and services in return. Trade on the national level expands, and with it employment and incomes. Everyone gains access to more and varied goods and services (including education and health services), which raise the standard of living. Access to the interna- tional economic system that the creation of transport and communications infrastructure can provide serves to reinforce these trends. But infrastruc- ture goes far beyond roads - power and water distribution systems are of particular importance to Afghanistan. The provision of power and energy is an essential to the everyday functioning of the economy, as well as to the process of industrialization. However, it serves much more basic needs as well - lighting, cooking, heating and operating water pumps - needs that are felt by every household. The ability to meet these needs provides a test of the success of development. A. Transportation 7.02 Twenty years ago someone wrote that "The economic organization of Afghanistan resembles a wide sea dotted with islands of economic activity, each one more or less limited to its own local market, primarily because of inadequate transportation." 1/ The heavy emphasis on road infrastructure during the First and Second Five-Year Plans did much to integrate the major geographical regions of the country, and particularly the main commercial centers. Until then more trade probably took place between individual re- gions and the outside world than between regions themselves. As recently as 1960, the regional differences in the price of wheat (then, as now, the principal commodity traded) were as high as 150 percent, but by 1966, they had dropped to about 30 percent, almost solely because of the new all-weather roads. 2/ By 1977, the major regional price differentials had almost entirely disappeared (except for transport costs) as a result of greatly improved communications. Nevertheless, many villages are still extremely isolated and only an estimated one-third to one-half of all foodgrains enter the market. (i) The Transport System 7.03 Roads are the principal mode of transportation for both internal and international traffic. The total length of all types of roads in the country is estimated at 17,000 km. In 1975 the all-weather road network extended 1/ Quoted in Fry, Maxwell J., The Afghan Economy. E.J. Brill, Leiden, Holland, 1974, p. 56. 2/ Fry, op. cit., p. 58. - 140 - -9,200 km of .which 2,560 km were asphalt and concrete highways. The remaining roads are gravel roads, tracks and improved earth roads many of which are impassable for much of the year. The highway network pattern is largely the result of the main geographic and economic features of the country. The prin- cipal agricultural areas and major population centers are linked by a highway system which circumvents the Hindu Kush mountains in the center, and which links Kabul in the east with Baghlan and Mazar-i-Sharif in the north, Kandahar in the south and Herat in the west (see Map IBRD 10642R). The roughly circular network is presently being completed with the construction of the Shebergan- Maimana-Herat link. Trunk roads radiate from this circular network into urban centers like Kunduz, Jalalabad and Gardez as well as into neighboring countries through which most of Afghanistan's international trade is routed. In general, the length of the primary highway network in Afghanistan is reasonable and adequate to serve the major regions of the country. The principal need is to improve certain existing sections and to upgrade their maintenance. The sec- ondary and tertiary roads linking the rural provinces, small towns, villages and farms with the major highways, are generally substandard to handle traffic at reasonable cost. In many cases, they constitute real bottlenecks to the economic development of their hinterlands. 7.04 A considerable amount of traffic is carried by animals, mostly camels and donkeys, even over long distances and on routes not yet served by the road network. However, access to motorable farm-to-market roads is essential if farmers are to enter the market economy on a large scale. Afghanistan's pre- sent road system is most deficient in this respect. The road density of .027 km of road per square kilometer of land places Afghanistan among the bottom fourth of developing countries. Although a scattered population and the presence of large uncultivable expanses do bias the road density figure downwards, the ratio of roads to cultivated land of 0.354 km of road per square kilometer of land is still very low. 7.05 As a land-locked country, international transport routes are of vital significance. The following are the main routes presently used: (i) Commercial road traffic across the border is prohibited by the USSR. However through its agency Sojuzneshtrans, the USSR offers Afghanistan extensive land transport links to the Pacific (via Vladivistok), to northern Europe and America (via Leningrad) and to southern Europe (via Black Sea ports) based upon a combination of railroad and shipping services. The Russian railway system (gauge 1.52 meters) has a station 1 km inside Afghanistan at Torghundi and on the Russian side of the Amu Darya River at Termez, which is connected with Afghanistan by means of river barge services to Hairatan (13 km) and Sherkhan (183 km). (ii) Via Pakistan: With very rare exceptions, all the cargo to the port of Karachi must be transshipped to Pakistan railway lines (gauge 1.66 meters) mainly at Peshawar (1450 km) and sometimes - 141 - at Chaman (938 km). The port of Karachi has considerable con- gestion problems and Afghan commerce is often given a low priority. The operation of through trucks between Afghanistan and India is not permitted by Pakistan, and cargoes, mainly fruits, must be transferred first to Pakistan vehicles and then to Indian ones. (iii) Via Iran: Access to the sea is by way of the twin ports of Khorramshahar and Bandar-i-Shahpur, both heavily congested and with time consuming clearing procedures. The ports are located about 2,300 km from Herat. The cargo is normally expected to be moved by Iran Railway (gauge 1.435 meters) from Mashhad (240 km west of the border and 320 km from Herat), although Iranian trucks can be used in case of necessity. The transit treaty between Iran and Afghanistan does not permit the through movement of commercial vehicles from a city in one country to a city in the other. However, Afghan vehicles are permitted to operate up to the rail terminal in Mashhad and Iranian vehicles up to Herat. Afghan vehicles transiting Iran have so far been permitted to operate without difficulties. 7.06 In 1975, Afghanistan's export, import and transit amounted to about 950,000 tons; 70 percent was moved through the USSR, 20 percent through Pakistan and only 10 percent through Iran. More than half of the total international cargo of the country was moved through the river port of Hairatan located at the border with the USSR. Firm information for 1976 was not available by mid-1977, but it is estimated that the total was about 10 percent higher than in 1975. 7.07 The country's civil air transport system has been developed over the last 20 years with American and Russian aid. It now comprises 20 airports and airstrips of which Kabul is by far the most important. Domestic civil avia- tion serves an administrative and social function by providing access to areas with poor or non-existent road connections. Internationally, because of Afghanistan's remoteness from the major tourist generating countries, aviation is the only realistic means by which the country's considerable attractions could in the future be made accessible to the international mass tourist mar- ket. International aviation in Afghanistan is very much centered on Kabul air- port, which was opened in 1962. In 1969 it handled around 55,000 passengers; this rose to over 106,000 in 1976,- which represents a significant annual growth rate of almost 10 percent (see Volume II, Table 10.2). The other international airport of the country, Kandahar, handled only 6,600 passengers in 1976, and operates mainly as an alternative to Kabul when Kabul is fog or snowbound. The traffic distribution during the course of the year has signif- icant variations mainly due to the impact of the climate on tourist travel to Afghanistan. In Kabul the peak month in 1976 was August with about 12,500 international passengers, whereas in January, February and March it dropped to almost half of the number. The total amount of international cargo loaded and unloaded at Kabul airport in 1976 was almost 6,000 tons. For domestic traffic, Kabul is again the most important airport; in 1976 it handled around 12,000 domestic passengers representing over 40 percent of national traffic. - 142 - 7.08 The remaining two modes are river transport and pipelines. River transport takes place only on the Amu Darya River for international traffic between Afghanistan and the USSR, with all commercial vessels owned and operated by the latter. 1/ The main river ports are Sherkhan and Hairatan. The ports are administered by the Port Department under the Ministry of Commerce. Approximately 100 miles of pipelines link the gas fields around Shebergan with the Russian border at Kleft. 7.09 No railway exists because in some areas the mountainous terrain makes construction too difficult and expensive, while the volume of bulk products for long distance hauls is at present not significant. Nevertheless, the Government is considering the possibility of building some 1,800 km of railways, which according to preliminary estimates will cost about $1.2 billion. It is proposed to spend about 80 percent of that amount during the present Seven-Year Plan, 1976/77-1982/83, and the remainder during the next Plan. (ii) Institutional Framework 7.10 Two organizations bear responsibility for the construction and maintenance of roads: The Road Construction and Maintenance Department of the Ministry of Public Works (RCMD), and the Rural Development Department (RDD). RCMD is responsible for administering the primary and secondary road network outside the municipalities. Feeder roads from the farmland to the main roads and woleswali centers as well as small irrigation structures and bridges are the responsibility of RDD. RDD's programs will be discussed in the section on rural infrastructure below. Roads in the Helmand and Paktia project areas are the responsibilities of the respective development authorities, both under the Ministry of Agriculture and Irrigation. 7.11 The RCMD is now divided into two directorates: The Roads Engineer- ing Directorate and the Road Maintenance Directorate. The present organiza- tion suffers from many deficiencies - continuous changes and transfers of key personnel, salaries too low to attract qualified people, decision-making power concentrated in a very few high level officials, lack of a clear defini- tion of responsibilities, absence of appropriate planning capabilities, etc. Some of these problems are inherent in the overall administrative system of Afghanistan, and some are specific to RCMD. In the circumstances it is surprising that the maintenance of the primary road system has been generally adequate. The failure has been on the secondary and tertiary road network where maintenance and road improvements should play a far more significant role in the evolution of the road network than they do at present. 7.12 There are no Afghan private road construction firms and no effective government incentives to create one. There are of course small private con- tractors capable of doing work on culverts and other minor structures, but 1/ Although in the eastern region significant quantities of logs are floated down the Konar River to the Jalalabad area for road trans- portation from there. - 143 - there is a limit of Af 5 million on any contract to be let to them. Road construction work is now mainly done by military conscripts under the direc- tion of Army officials. As a consequence of the lack of private road construc- tion industry, there is an absence of competition, delays in road construction works, uncertainties with respect to road construction costs, time-consuming procurement procedures, etc. 7.13 Civil aviation is the responsibility of the Afghan Air Authority. It also has serious institutional and administrative difficulties. By 1973, there was general agreement that the most effective way of dealing with the administrative difficulties confronting civil air navigation would be to establish a separate entity with general responsibility for the provision of civil air navigation, air traffic control and air communication services. That entity, to be called Air Navigation Services (ANS), was supposed to be run on a commercial basis and to be organized to provide clear lines of command and communication between its headquarter's staff and its field staff. By mid-1977, the new institution had not yet been established. (iii) The Strategy for the Development of the Transport System 7.14 The economic development of Afghanistan is seriously affected by its geography and topography. The Government is aware that one of the key objectives must be to establish an efficient transport system. The wide dispersion of population calls for a rather extensive transport network, main- ly of low-cost low-volume roads. 1/ However, the physical features of the country work in large part against such a strategy by raising construction and maintenance costs even on low-cost tertiary roads, and making transportation costs high. These features include: (i) the rocky, mountainous terrain, which causes road and, obviously to an even greater degree, railroad construction to be difficult and costly; (ii) the small size and relative inaccessibility of areas with economically exploitable resources requiring an extensive net- work with low traffic volumes and hence low standard roads scattered all over the country; (iii) the harsh climate with extreme daily and seasonal temperatures especially in the northern and central regions, which increases construction, and routine and emergency maintenance costs; and 1/ About 47 percent of the population live in the eastern region, where population density rises in places to over 100 persons per square kilo- meter. The north contains about 28 percent of the population, the south 14 percent and the west 11 percent all with much lower densities. - 144 - (iv) the difficulties in navigating rivers and streams, which pre- cludes using this low-cost means of transportation. 7.15 International transport to and from Afghanistan is also affected by: (i) the country's remoteness from the principal markets; (ii) its land-locked situation which necessitates frequent transship- ments to arrive at the final destination, with long and unpredict- able transit times, excessive loss and breakage and, therefore, high credit costs and insurance premiums; (iii) the dependence of its international routes on political, transport, and other conditions in neighboring countries; (iv) the absence of unrestricted access to the sea which causes long clearing times because Afghan cargo in neighboring countries' ports normally receives lower priority than national cargo. 7.16 The success of the development strategy must be measured by the extent to which it can come to terms with these geographic and physical constraints on the nation's development. During the First and Second Five- Year Plans, 1957-66, the top priority was ending Afghanistan's geographical isolation and integrating the regions of the country. About AM 15 billion (including foreign assistance) were spent during the two Plans, which com- prised 42 percent of total development expenditures. The most important links were the Kabul-Kandahar-Herat highway, the Salang route to the north, and the routes to Jalalabad, Spin Boldak (Pakistan Railhead) and Islam Qala (Iranian border). 7.17 During the Third and Fourth Plans (1967-73), transport was sup- posed to play a much smaller role, receiving only 15 percent and 10 percent of planned expenditures. Within this reduced allocation there were also significant shifts in allocations. Expenditure on highway improvements and maintenance increased to 21 percent of total highway expenditures by the end of the Third Plan, and were to increase to 47 percent during the Fourth Plan. Total highway construction expenditures during the Third Plan amounted to AM 2.9 billion, or an average of Af 0.58 billion per year. The shift away from new construction reflected increased Government emphasis on protecting the considerable investments made earlier in the highway system and seemed to be a change in the right direction. 7.18 The First Seven-Year Plan envisions a massive increase in investment in transport infrastructure. The Transport and Communication Sector has the second highest allocation of funds - Af 55 billion or 32 percent of planned expenditures. Of this, about AM 40.5 billion is envisioned for the construc- tion of a 1810 km railway linking Kabul with Iran and Pakistan. The project is to be completed in the following Plan period. The railway is to follow the circular trunk road. A loan from Iran is expected to finance the project. Although a pre-feasibility study has suggested that the project is justified, in the view of the World Bank the project is highly questionable. It will be - 145 - difficult to demonstrate that the railroad could attract enough traffic to justify the big investment required to build and operate a railroad line in such a difficult terrain. The pre-feasibility study which was not available to World Bank staff at the time of preparation of this Report, argues that the viability of the project does not rest on the feasibility of the Hajigak iron ore project. Previous proposals had always put it in that context. The iron ore deposit has a very difficult access and will require about 200 km of rail branch line to connect with the main line. The construction and operation of a railroad line demands the support of a good organization and the participa- tion of many skilled technicians and workers. For a country with no previous experience in railroad operations, with a shortage of skilled people and with serious institutional problems in almost every area, the task of running a railroad efficiently will be extremely demanding. A difficult technical problem will be the selection of the appropriate gauge. The country's main international land routes via the USSR, Pakistan and Iran, utilize the respective national railroad lines which each have different gauges (see para. 7.05 above). If Iran finances the project, presumably their gauge would be the one finally selected, but due to congestion in Iranian ports only 10 per- cent of Afghanistan's international traffic is presently using this route. For the rest, additional transfer costs would be required. 7.19 Approximately Af 10 billion is allocated to for highway construction, about 6 percent of total planned expenditures. Merchandise transport is pro- jected to double during the Plan period, and passenger transport to rise almost sixteenfold. The network of improved roads is to be increased from 9,200 to 11,000 km, and the network of paved roads from 2,600 to 3,700 km. The density of Afghanistan's primary road network is reasonable and adequate to serve the principal regions of the country, but the system of the secondary and tertiary roads still has a long way to go before it meets the needs of the country's development. Improvement and proper maintenance are the main needs of the primary road network, while a more adequate construction program should be devised for secondary and tertiary roads. It is these secondary and tertiary roads that are critical to the development process. They open up new, pre- viously inaccessible, regions and permit access to outside health services, schools and markets. Access to markets is critical to the economic develop- ment of rural Afghanistan, for although from half to two-thirds of all agri- cultural produce is currently consumed on location, this is undoubtedly in part the consequence of very poor or non-existent transport facilities. If farmers have access to markets, there is incentive for them both to increase production and to make use of the modern inputs that will enable them to do so. There is a great need to increase emphasis on tertiary roads yet the Plan envisions less than 2,400 km of such roads, only slightly more than the length of primary and secondary roads to be constructed. From a purely economic point of view, it would seem that, in general, secondary and tertiary roads should be built to low standards. High construction costs and low volumes of traffic preclude the justification of higher standards for secondary and tertiary roads. Perhaps, the best course to follow would be to carry out small improvements with maintenance forces in most of the secondary and ter- tiary road network rather than undertake a complete improvement of selected roads. - 146 - 7.20 It is in this light that the maintenance expenditures in the Plan must be assessed. About Af 1.8 billion has been allocated for highway main- tenance. The projections show a substantial decline in total annual alloca- tion for this purpose from 1980. After that date allocations would be insufficient to maintain the road network according to sound engineering and transport standards. Government officials indicate that the decline is due to the intention of transferring allocations for highway maintenance from the development to the ordinary budget and to the absence of foreign aid commit- ments for this purpose from 1980 onwards. The procedure of leaving these amounts out of the Plan projections is highly unsatisfactory given the prior- ity which ought to attach to maintenance, and which it is unlikely to receive as part of the ordinary budget. 7.21 With regard to international transit a significant step has been taken through the establishment of an international truck company for opera- tions with Europe. Truck transport costs will probably be higher than the present transportation of goods by multiple modes, but trucks will substan- tially shorten transit time, provide firmer delivery dates, reduce loss and spoilage and consequently reduce credit costs and insurance premiums. Afghanistan has recently signed the T.I.R. Convention, and the truck company would operate under agreements of that Convention. The Company was formed at the end of April 1977, and consists of a joint venture between the Government and a subsidiary of Dutch Railways. The Government has a 51 percent participa- tion in the company which was financed by the Dutch Government. Initially the company's fleet consists of ten 20-ton trucks, and operations started in mid-1977. Six weeks is the time estimated for a truck round trip to Europe as compared with several months on the present multi-modal routes. 7.22 Air transport has an allocation of Af 1.1 billion in the Seven- Year Plan for construction and maintenance. This is roughly four times the amount allocated in the previous seven-year period. About 50 percent of the allocation is foreign aid, and the main project is the construction of a new airport at Logar, some 47 km to the south of Kabul, at an estimated total cost of $55 million. A feasibility study was presented by consultants in June 1975. Kabul airport has limited potential as it cannot meet safety standards for wide-bodied jets due to its location. It will be a matter of projecting the growth in traffic, particularly of tourist arrivals, before a decision can be made on the need for this investment at this time. (iv) Transport Market and the Vehicle Fleet 7.23 The nature of the transport market currently and in the foreseeable future is of crucial significance to the overall transportation sector strategy that Afghanistan should pursue. Statistical information on transport demand is insufficient and sometimes contradictory. The main sources of information are annual road traffic counts performed by the Ministry of Public Works, toll station data, airport and port traffic statistics, and special traffic studies conducted by consultants for specific projects. With respect to road traffic, a country-wide origin-destination survey was carried out in July-August 1970 by RCMD with the assistance of consultants. This survey has not been updated since. - 147 - 7.24 On a national basis, road freight was estimated by the Government at about 800 million ton-km in 1968 and at 1,300 million ton-km in 1975 repre- senting an annual growth of around 7 percent. Road passenger transport in 1975, the only year for which information is available, was officially esti- mated at 420 million passenger-km. Air cargo was 7.5 million ton-km in 1968 and 10.5 million ton-km in 1975, while air passenger transport was 80 million passenger-km in 1968, and 250 million passenger-km in 1975. 7.25 In 1975, the average daily traffic (ADT) in the Eastern Region varied between 500 to 1,500 vehicles on primary roads (about 650 km), between 100 and 500 on secondary roads (about 950 km), and less than 100 vehicles on tertiary roads (about 2,600 km). Traffic volumes on the roads in other regions were not as high, and the ADT varied between 100 to 800 vehicles on primary roads (about 1,800 km), between 50 to 100 on secondary roads (about 1,900 km) and less than 50 vehicles on tertiary roads (about 5,300 km). Map IBRD No. 13067 presents the 1975 ADT available information on different links of the network. 7.26 RCMD traffic counts show that, in the period 1971-75, the average annual growth rate of traffic was about 8 percent, substantially higher than the GNP growth estimated at an annual rate of about 2.5 percent for the same period. This could indicate that the country is in the process of drastically increasing the participation of vehicles, especially trucks and buses, in the national transport of passengers and goods. In 1975, the road vehicle fleet comprised 50,864 vehicles, comprising 11,018 trucks, 6,214 buses, 14,422 private cars and 13,397 non-private cars and taxis. The rest of the fleet included motorcycles, tripeds, etc. The road vehicle fleet increased during 1973-75 at an annual rate of approximately 15 percent, with the highest increases in buses (26 percent), taxis (25 percent), and trucks (13 percent). Unfortunately, information on the fleet is available only for three years and, therefore, no firm trends can be established. 7.27 Based on the results of RCMD Traffic Department counts, the regional distribution of inter-city road traffic volumes in the period 1971-75 has been roughly the following: eastern region: 50 percent; northern region: 30 per- cent; southern region: 13 percent; and western region: 7 percent. The regional distribution of registered vehicles in 1975 was as follows: eastern region: 75 percent; northern: 10 percent; southern: 10 percent; and western 5 percent (see Volume II, Table 10.1). In the Eastern Region, the vehicle registration percentage is substantially higher than the inter-city traffic percentage, probably due to the considerable number of vehicles in Kabul that operate mainly in the city and, therefore, do not enter into the inter-city traffic counts. Despite the concentration of vehicles registered in the Kabul area, it seems that all four regions are adequately served by trucks and buses. 7.28 Concerning vehicle characteristics, about 55 percent of inter-city buses are mini-buses with a load capacity of up to 20 passengers, relatively new and normally used for rather short distances of less than 100 km. The remaining 45 percent of the buses have a capacity of between 35 and 50 pas- sengers and are used for longer trips; their average age is about 5-8 years. - 148 - Most of the trucks are small: 71 percent have a load capacity of 6 tons or less, 20 percent between 6 and 8 tons, 7 percent between 8 and 10 tons, and only 2 percent have a capacity greater than 10 tons. Over 90 percent of the trucks have two single axles with four wheels on the rear axle; truck- semitrailers only represent about 1 percent of the fleet. The age range of trucks is extremely wide with some units over 30 years old; most have an average age between 5 and 10 years. Truck overloading is very common and a major problem partly explained by the tariff system (see para. 7.32) and the lack of controls. In general, there are enough trucks on the primary roads. The situation is different for the secondary, tertiary and feeder roads where it is more difficult to find adequate transport, since there is not enough competitiop among truckers, and therefore the transport cost is unreasonably high. 7.29 The sector is dominated by small transporters owning only one or two trucks. Access to the transport market is relatively free. Some of the individual transporters are organized in transport associations which procure and distribute shipments among their members. Government goods, which account for about 40 percent of the total haulage, are handled by the big associations. The main government goods are construction materials, cement, petroleum products, sugar, wheat, fertilizers, wood, minerals, etc. The grain trade dominates the non-government transport market. 7.30 On November 15, 1972, a Road Traffic Law was enacted establishing general principles for the regulation of road traffic. The law is not effectively enforced. Matters that should be of great concern to traffic authorities are driver education and vehicle inspection to reduce the very high rate of accidents. The main reasons for this high rate of accidents are reckless driving, overloading, the movement at night of vehicles without lights, vehicles parked in the roadway, the presence of large stones on the road used earlier in parking trucks, vehicles traveling in the middle of the roadway, people and animals on the roadway, etc. Extensive enforcement of traffic regulations, inspection and education are needed to improve this situation. (v) Government Regulation and Taxation of Road Transport 7.31 At the present time, there are practically no enforced regulations on weights and dimensions of vehicles, and trucks and buses especially are often greatly overloaded. While it is important to establish maximum limits for axle loads and vehicle dimensions, it is even more essential to enforce them. This will require a major change in the attitude of the responsible authorities to avoid such overloading and the accidents it causes, and undue wear and tear of the roads. The operating condition of vehicles should also be periodically inspected by the authorities to avoid such very common problems as vehicles without lights, with poor braking systems, etc. 7.32 In general, the truck and bus fleet is old, in some cases 30 years or more, which means high operating and maintenance costs. Besides financial constraints, the new customs duty structure of August 1975 discourages the purchase of new vehicles by specifying duty discounts as a function of the age - 149 - of vehicles. For buses and trucks the duty discount is 20 percent for one model old (in practice over one year old), 30 percent for two model old, and 40 percent for three or more model old. Also, customs duties for buses and trucks increase substantially in accordance with the capacity of the vehicles. A truck with 10-ton load capacity pays about 50 percent more duty than a 6-ton truck. (For more information on customs duties, see Volume II, Table 10.4.) The general result of the customs duty system is that trucks and buses tend to be small and old and that road transport costs might be higher than necessary. A study should be undertaken to arrive at an optimum tax structure for road vehicles. 7.33 The custom duty structure for cars has a similar pattern (see Annex 3). Cars with higher engine capacity pay more and the age discount is 40 percent for one model old, 30 percent for two model old, 20 percent for three model old and 10 percent for four or more model old. This is an extraordinary structure which is almost impossible to explain logically. As an example of the magnitude of the custom duty, a new 2,000 cc car pays Af 400,000, almost US$9,000 or the original manufacturer's price if that is less, as customs duties. Again, this situation should be studied in detail. 7.34 Tariffs for road freight distinguish between government goods and private goods. Official tariffs govern the transport of government goods, whereas for private goods tariffs are agreed after a bargaining process between the shipper or middleman and the transporter. Government goods account for about 40 percent of the total haulage. The present official tariffs of 1.8 Af per ton-km on flat roads and 2.0 Af per ton-km on rolling and/or mountainous roads, without any distinction of type of cargo, seem to be below the cost estimated at about 4.0 Af per ton-km, for a typical truck operated most of the time in flat or rolling terrain under normal road condi- tions and a 50 percent load factor. Tariffs for private goods depend on the condition of the market. During harvest peaks in summer, tariffs are generally higher than official rate, but in time of low demand, tariffs may decline even below the official rates. Competition among transporters is keen on primary routes, but this does not necessarily apply to secondary and tertiary roads (most of the farm-to-market roads), where due to poor road conditions only a few transporters operate on a regular basis. In remote areas, this leads to a quasi-monopolistic situation where tariffs are fixed well above the official rates, for example, as much as 7 Af per ton-km for a one-way delivery of rice. The improvement of the secondary and tertiary road system will increase trans- port competition, and therefore most of the benefits will be passed on to farmers and producers, with a consequent increase in the volume and/or value of production. Bus tariffs are also rather low. A bus ride from Kabul to Herat (1,085 km) costs 180 Af per person, or 0.17 Af per pass-km. Both trucks and buses are greatly overloaded to compensate for low income per kilometer on account of low tariffs, and of course this is detrimental to the fleet in the long run. A rational tariff system should also be a matter for study. (vi) Conclusions 7.35 Although the benefits have been substantial, the rapid development in recent years of the primary road system in Afghanistan has strained the - 150 - country's limited institutional capacity and supporting policy framework for the transport sector. Fortunately this has not reached a point where it has impeded the operation of the primary road system, but it does suggest that much higher priority than is evident in the Plan should be given to mainte- nance, institutional improvements, and study and reform of the existing regulatory system. The strategy of expanding the primary transport network is still inherent in the Plan, albeit that the emphasis is on railways rather than roads. This is not consistent with the development path which has been identified in the preceding chapters of this report. It is the World Bank's view that Afghanistan's potentials lie in the development of an agricultural surplus which can be processed in various regional centers both for domestic consumption and export. A strategy for transport development in support of these potentials would emphasize the construction and improvement of village to market roads. As important as the productive impact of such investments would be, there would be still greater benefits from bringing education and health services in closer reach of large groups of the population who are deprived of them at present through lack of convenient physical access. B. Telecommunications 7.36 During the years 1966/67-1976/77 a total of Af 305.4 million was allocated for posts and telecommunications services, which constituted only 0.8 percent of the Government's total development expenditures for that period. At the same time investment increased by 14.3 percent a year on average. The number of post offices rose from 226 to 281 during the ten years and the number of telephones rose from 9,900 to 22,000. At present, there are 1.6 telephones for every 1,000 persons, and one post office for an area of 2,300 square km serving 50,000 people. The capacity of telephone exchanges both manual and automatic, is about 26,000 lines and is mostly concentrated in the cities of Kabul - some 13,200 lines, Herat, Mazar and Kandahar - a total of some 4,500 lines, all automatic. The number of tele- graph offices was reduced from 29 in 1963/64 to 18 in 1975/76 due to the expansion of the telephone system. 7.37 Since telecommunications requires sophisticated technology, its development is costly. It also needs sound managerial and administrative skills. Policies towards the improvement of the telecommunications system have been realistic. During the Seven-Year Plan (1976-1982) a total of Af 2.17 billion will be allocated for telecommunications services. The capacity of telephone exchanges will be expanded,by 19,700 lines of which 7,000 lines will be under an FRG credit. The number of telephones will be increased from 22,000 in 1975 to about 40,000 by 1982. Provision has been made for the improvement of the quality of the Telecommunications Training Center and changes will also be made in methods of administration. Tele- communications services will be extended to backward regions of the country. A UNDP financed team of planners have recently been studying the possibility of reducing the number of telecommunications regions from 24 to 5 so that services can be concentrated in fewer centers combined with more effective decentralization to these regional headquarters. - 151 - 7.38 The telecommunications network has an important role to play in drawing Afghansitan's scattered population into a unified administrative framework. It will permit better co-ordination between regional officials and the central administration in Kabul. It will also facilitate the growth of commerce and banking outside the capital, for which good telephone connec- tions are of vital importance. The investment program in the sector should be reviewed to ascertain whether it is sufficiently supportive of these objectives, or whether it perpetuates a pattern of intra-city, and particu- larly intra-Kabul expansion. 7.39 No review of the communications sector would be complete without a mention of the Government's proposals for the establishment of a colour television service with assistance from Japan. The initial investment of $3 million is not very large, but the cost of expanding this system from Kabul and of importing colour sets would be substantial. Afghanistan would have the dubious distinction of having the lowest average per capita income of any country with colour television. Although it is ostensibly to be used for educational purposes, in practice it is likely to benefit the upper middle-class in the capital city. With the best will in the world it is dif- ficult to argue that this is consistent with the Government's commitment to economic development in general and rural development in particular. C. The Energy Sector 7.40 The per capita consumption of energy in Afghanistan is one of the ten lowest in the world. Yet energy is at the heart of the development process; moving people and goods, running industries, and providing heat and light. As such, the consumption of energy almost always grows faster than GNP - over twice as fast in many developing countries. The pace at which energy resources are developed therefore takes on critical importance in terms of the overall investment mix, the balance of payments implications and the growth of national income. (i) Primary Energy Resources and Development (a) Reserves, Production and Demand 7.41 Afghanistan's main energy resources are coal, natural gas and hydro- power; petroleum reserves so far identified are minor in comparison. Esti- mates of the reserves of each energy source and hydropower potential are subject to a wide margin of uncertainty. The available data on principal energy resources are shown in Table 28. - 152 - Table 28: PRIMARY ENERGY RESERVES 10 tce / % total reserves Low Estimate High Estimate Low Estimate High Estimate Coal 329 640 59 73 Natural gas 147 147 26 17 Petroleum 12 17 2 2 Hydropower /b 74 74 13 8 Total* 562 878 100 100 /a tce = ton standard coal equivalent = 7 x 106 kiloealories (kcal). /b Economic potential, assuming this is 60 percent of the estimated tech- nical potential. About half the economic potential is on the Amu Darya (Oxus River) dividing Afghanistan from Russia, and presumably could be developed only as joint projects. In addition to fossil fuels and hydropower, "traditional" fuels, such as fire- wood, charcoal and various agricultural and animal wastes, are an important energy source at Afghanistan's present stage of development, but no estimates of their size are available. 7.42 Systematic exploration for oil and gas started 20 years ago with the launching of the Russian technical and financial assistance program. The exploration effort has been confined almost exclusively hitherto to northern Afghanistan under Russian guidance, and although under the current Seven-Year Plan the oil exploration effort is to be intensified it still appears inadequate in relation to the size of the country. In addition to the Russians, there has been some foreign interest which would be considerably stimulated if the Government were to introduce legislation offering adequate guarantees and incentives to foreign oil companies to undertake the risks of exploration. A UN expert is currently advising on a draft ordinance, adoption of which should be a matter of priority. 7.43 Coal-mining is the oldest-established of the fuel industries, having started some 60 years ago, while natural gas and petroleum production began only about 10 years ago. Coal production has fluctuated erratically in recent years (see Table 2), and 1976/77 output of 141,000 tce was still 7 percent below the level of 1970/71, reflecting the difficult conditions in the indus- try (see para. 7.60). Production of natural gas which accounts for the grea bulk (93 percent) of indigenous energy production, rose so a peak of 2,995 m m in 1975 1/ (Table 3), but declined in 1976/77 to 2,641 m m, (the remaining 1/ Gas production figures relate to calendar years, since supplies to the USSR are based on the calendar year. - 153 - field life is 50 years at this rate), only about 2 percent above the 1970/71 level. Crude oil production nearly quadrupled to 10,000 tons over the period but remains relatively insignificant. On the other hand, hydropower generation rose steadily over the period, from 382 GWh to 535 GWh. 7.44 Available data on the recent trends of demand are given in Volume II, Table 9.4. The following table summarizes the main trends of domestic demand for the various sources: Table 29: DOMESTIC ENERGY DEMAND 1970/71 - 1976/77 1970/71 1976/77 Annual % Total % Total Growth '000 tce Demand '000 tce Demand Rate % /a Coal 151 31 160 22 + 1.0 Petroleum Products 291 /a 59 344 /a 47 + 2.8 Natural gas 7 1 159 22 +68.3 Hydropower 47 9 66 9 + 5 8 Total 496 100 729 100 + 6.6 kgce/cap 33 43 /b + 4.5 /a 1970/71 figure includes 4 mtce, and the 1976/77 figure 15 mtce, of domestic crude oil, the rest being imported petroleum products. /b This puts Afghanistan amongst the 10 lowest countries in the world in terms of per capita energy consumption and compares with an average for all developing countries of about 380 kgce. 7.45 Although the relative shares of hydropower and fossil fuels as a whole are unchanged, there has been a marked shift from coal to hydrocarbons. The big increase in the share of natural gas (from 1 percent to 22 percent) reflects the start-up during this period of the fertilizer plant at Mazar-i- Sharif, which uses natural gas as a feedstock, and of the associated thermal power station, which is fuelled by natural gas. As shown in Volume II, Table 9.5, these currently account for virtually the whole (94 percent) of domestic consumption of natural gas. the balance being made up of pipeline losses and the relatively negligible own consumption of gas at the production field. However, nearly all (95 percent in 1976) natural gas produced is exported to the USSR under an 18-year contract concluded in 1968. The contract specifies the quantities of gas to be delivered each year but not the price, which is the subject of a separate negotiation in respect of each year's deliveries (see para. 7.51). 7.46 Apart from the small quantity of domestic crude oil, all petroleum products (gasoline, diesel oil, kerosene and lubricants) are imported. Figures of actual consumption of petroleum products could not be obtained and would differ from imports depending on movements into or out of stocks, on which no - 154 - information is available. However, the import figures probably give a reason- ably close approximation to the trend of consumption. Imports almost doubled in the early 1970's but then declined almost equally sharply in the following two years, and have since only partially recovered. As a result they were only 15 percent above 1970/71 in volume terms by 1976/77. There was a par- ticularly sharp drop between 1973/74 and 1974/75, presumably reflecting the impact of the quadrupling of world oil prices in 1973. Table 30 shows the change in the pattern of consumption of different petroleum products. Table 30: IMPORT OF PETROLEUM PRODUCTS 1970/71 - 1976/77 1970/71 1976/77 '000 tons Total Imports '000 tons Total Imports Gasoline 107.7 57 75.4 35 Diesel oil 72.8 39 125.4 58 Kerosene 3.0 2 2.0 1 Jet fuel - - 10.4 5 Lubricants, 3.6 2 1.0 1 Total 187.1 100 214.2 100 The decline in gasoline consumption would appear to reflect the substitution of diesel oil for gasoline.' 7.47 "Traditional" fuels (firewood, charcoal, agricultural and animal wastes) are an important additional energy source in Afghanistan. No up-to- date estimates of their consumption are available but, according to a 1965 study by a UN expert 1/, total consumption of these fuels in 1963 amounted to the equivalent of 258,000 tce, which was 64 percent of total estimated energy consumption in that year. If the same ratio still prevailed, this would imply a consumption of some 1.3 m tce in 1976/77. However, in view of the greater availability of coal and petroleum products, and the relatively high prices of firewood and charcoal (see para. 7.48) it is unlikely that the relative share of the traditional fuels has remained so high; but, even if their consumption since 1963 has merely kept pace with the growth of population, this would imply a current level of consumption of about 34,000 tce or 20 kg per capita (compared to about 25 kg for Iran). The indications are, in fact, that the country's forestry resources are being seriously over-exploited as a fuel source. 2/ 1/ "Report on Coordinating the Development of Afghanistan's Energy Resources", E. Eskilsson, 1965. 2/ In some areas exploitation of forests for firewood is estimated to be 10 times what the forest growth rates would allow, and over the country as a whole the rate of exploitation is put at three times the natural growth rate. - 155 - (b) Prices and Marketing 7.48 The prices of all fuels are controlled by the Government. Coal is the cheapest fuel at current prices in terms of heat value, except for natural gas, which is supplied only for export and to the power station and fertilizer plant at Mazar-i-Sharif. Firewood is two to three times the cost of coal. The comparative figures are as follows: Table 31: COMPARATIVE ENERGY COSTS Af/10 kcal Coal (a) Powder 146-153 (b) Lump 230-248 Crude oil 432 Diesel oil 859 Natural gas (a) Export 96 (b) Domestic 40 Firewood 479 7.49 For coal there is a two-price structure, government departments and industry being charged higher prices than ordinary consumers. Both prices are relatively low however, and the coal industry operates at a loss in consequence. Coal prices have been unchanged for six years and bear no relation to current costs, resulting in a heavy and growing deficit which appears to be met only in part by the Government subsidy. This deprives the industry of the finan- cial resources for modernization and expansion. There seems no valid reason why domestic consumers of coal should not pay the full cost of supply, espe- cially considering it is already the lowest priced source of energy. Most consumers would also probably be willing to pay for improved supplies of coal. Another problem is that the marketing arrangements for coal, other than for supplies to the large consumers, are hopelessly antiquated and inadequate. For example, there is only one coal depot to serve the whole of Kabul, and in order to obtain supplies an intending purchaser must first apply to the Ministry of Mines and Industries for a permit, which he must then present to the national bank together with payment for the coal in order to obtain a receipt; only then can be collect the coal from the depot, on presentation of the bank receipt. 7.50 The main petroleum products, gasoline and diesel oil, are sold at uniform prices throughout the country, the current prices being Af 8.5/liter for gasoline (equivalent to US$0.68/US gallon) and Af 8/liter for diesel oil (US$0.64/US gallon). The current import prices for gasoline and diesel oil (at the Russian and Iranian borders) are respectively US$166/ton and US$133/ ton, equivalent to Af 5.8/liter and Af 5.5/liter. The costs of transporta- tion and distribution are not precisely known but are probably just covered in the selling prices. The distribution of petroleum products is undertaken by the Government monopoly. - 156 - 7.51 The price of natural gas deliveries to 3the USSR is negotiated annually. The price agreed was US$16.10/1,000 m in respect of the 1975/76 deliveries. Afghanistan is trying to obtain an increase of 20 percent for the 1976/77 deliveries which would be equivalent to US$2.44/million kcal, or US$0.61/million Btu, which seems low; 1/ it is said to be comparable with the selling price of Iranian natural gas to the Russians, but that is for flared gas which has no alternative use at present. Nevertheless, the energy balance of trade has been consistently in Afghanistan's favor in recent years, proceeds from natural gas exports regularly exceeding the cost of imported petroleum products, despite the relatively greater increase in petroleum product prices. The net favorable balance rose from US$4.3 m in 1970/71 to US$12 m 1976/77. Over the same period, although imports of petroleum products rose 15 percent in volume, the degree of dependence on imports fell, the share of petroleum products in internal consumption declining from 59 percent to 49 percent (Table 29). (c) Development Policy and Plans 7.52 The Seven-Year Plan emphasizes the importance of a sound energy policy for achieving the Plan's objectives of improved living standards based on industrial growth. The Projections in the Seven-Year Plan imply a marked acceleration of the growth rates of energy production and consumption compared with current rates. Consumption is projected to grow at 17 percent per annum, which seems unusually high compared with the Plan projection for GNP (6.per- cent per annum) since it implies an energy coefficient (ratio of energy growth rate to GNP rate) of nearly 3, whereas the value of this coefficient typically lies between 1 and 2. While this comparison is less relevant for Afghanistan with its extremely low base of energy consumption, the divergence is so great as to warrant examination even on the most generous assumptions concerning the pattern of industrial growth and increases in domestic energy consumption. This Report recommends a shift in the sectoral and locational pattern of industrial investment as compared with the Plan. The proposed pattern would be far less energy-intensive as well. As such, the Plan for energy development if achieved could be diverting more emphasis to energy than is necessary for the short to medium-run needs of the country, at the expense of other forms of investment. The consumption projections imply some signifi- cant shifts in the relative shares of the different energy sources. The share of coal rises to 28 percent of total consumption in 1982/83 compared with 20 percent in 1976/77, that of petroleum products rises to 50 percent (previously 49 percent), while the shares of natural gas and hydropower decline to 15 percent and 7 percent respectively (previously 22 percent and 9 percent). 7.53 Despite the rise in the share of petroleum products, the projections imply a decline in the degree of dependence on imported energy from 46 percent 1/ Unlike oil, there is no such thing as a world price for natural gas, the price of which can vary widely according to local demand and supply conditions. However, the price quoted here is at the lower end of the range of recent prices at various locations (US$0.62 - US$1.45). - 157 - to 34 percent of internal consumption. This is attributable to the fact that about one third of the 1982/83 requirement of petroleum products is assumed to be met by the output of a proposed 200,000 ton refinery using domestic crude oil. Nevertheless, the projections also imply an unfavorable shift in the energy balance of trade as the value of natural gas exports and of petroleum imports will be more or less equal in 1982/83, compared with the estimated favorable balance in 1976/77 of US$12 m. Nearly all the projected increase in natural gas output will be exported to the USSR, and expected increases in the requirements of the Mazar-i-Sharif fertilizer plant and power station account for most of the balance. It is not clear that the correct balance between natural gas exports and alternative domestic uses has been found, and it is strongly urged that a study be undertaken to prepare a master plan for the optimal use of Afghanistan's natural gas reserves. According to the Plan nearly all the projected large increase in coal output will be required for new or expanded industries (notably textile mills, cement and a thermal generating plant). Total consumption of coal by industry is projected to increase more than four-fold during the Plan period while consumption by other consumers is to slightly more than double. 7.54 To meet the projected future expansion in production and consumption of coal and hydrocarbons the Seven-Year Plan includes provision for 10 proj- ects (7 hydrocarbons, 3 coal). Total projected investment in the period 1976/77 - 1982/83 is Af 10.2 billion of which some 60 percent (US$136 million equivalent) is in foreign exchange, to be provided mainly by the USSR. 7.55 The basic premise of official energy policy as expressed in the Seven-Year Plan, viz. that development of the energy sector should be based on maximum utilization of indigenous energy resources, is sound, but numerous problems arise in connection with the program proposed in the Plan. The realism of the consumption projections for example is dubious, particularly those for coal and petroleum products. They appear to be based largely on assumed increases in industrial demand resulting from major new industrial projects, the timing, and even the likelihood of which, are themselves open to question. So far as non-industrial consumers are concerned, since data even on existing patterns and trends of consumption are lacking and there are no systematic arrangements for ascertaining future requirements, the estimates of their future demand must be subject to very wide margins of error. While some of the proposed uses for coal seem open to doubt, at least in the time horizon envisaged, there has been insufficient attention to other potential uses e.g. for thermal electricity generation, or in substitution for firewood (which must represent a much larger potential market than the 66,000 tons coal equivalent for non-industrial consumers in 1982/83 shown in the Seven Year Plan). Private energy demands are bound to grow rapidly in the coming years and considering the serious depletion which the few remaining forests are undergoing, coal will undoubtedly have to play a far larger role in domestic heating and cooking. Such large scale penetration of the firewood market must however, be preceded by radical changes in the present antiquated marketing arrangements for coal. 7.56 Even if the demand projections are accepted, there are likely to be severe constraints on the achievement of the projected production targets. - 158 - For example, given the present situation in the coal industry, particularly the catastrophic shortage of miners, the more than three-fold increase in output projected for 1982/83 seems most unlikely. According to senior offi- cials in the coal industry itself, 300,000 tons i.e., a doubling of present levels may be achievable, and even this would depend on a radical change in Government policy regarding miners' pay and work conditions. 7.57 Although the crude oil production target may be attainable, assum- ing there is no hitch in the development plans, achievement of the projected 1980/81 output of petroleum products of 190,000 tons would hardly be feasible even if a decision on the proposed refinery were taken by early 1978, given the lead time (3-4 years) for feasibility study, design, ordering of equipment and construction. Given the past history of delay in coming to a decision about this project, operation even by 1982/83 may be in doubt. Once the refinery is established there may be problems regarding the disposal of the large quantity of residual fuel oil (over 50 percent of total output). A further problem is raised by the inadequacy of the existing infrastructure (especially roads) in the areas of proposed new coal-mining development (Dare-Sauf and Sabzak). A big effort, of which there are no signs at present, would be required to make the necessary improvement. (d) Organization and Manpower 7.58 Responsibility for the energy sector is primarily shared between the Ministry of Mines and Industries (coal, petroleum and natural gas) and the Ministry of Water and Power (the power subsector, including development of hydropower resources). Under the Ministry of Mines and Industries are various functional departments and state enterprises including the Northern Coal Department (NCD) and the National Oil Corporation (NOC). The marketing and distribution of petroleum products comes under the Government Monopoly. Current employment in the coal and oil/gas subsectors totals around 6,000 comprising NOC 4,500, NCD 1,050 and the Government Monopoly probably about 700 (assuming half of its total manpower of 1,400 is concerned with its petroleum activities). NCD's current employment of 1,050 is only 40 percent of its authorized strength of 2,550. 7.59 According to a recent consultant's study, the organization and procedures of the Ministry of Mines and Industries are inappropriate for the efficient discharge of its responsibilities. The general reluctance to delegate responsibilities and the failure to fill both the posts of Deputy Minister acts as a drag on the whole decision-making process. Internal communications between sections and departments within the Ministry are poor, and cumbersome and outmoded administrative practices further slow down the execution of business. 1/ Reorganization of the Ministry and its internal procedures is needed, taking account of recent consultants' recommendations, 1/ An example is the procedure for obtaining a file from the records section of the Ministry, for which written authority is required, resulting in delays of up to several days merely to consult a file. - 159 - which include regrouping hydrocarbons and coal into a single division within the Ministry. The two vacant positions of Vice President in NOC should also be filled as a matter of urgency. Another organizational issue relates to the appropriateness of continuing the Government Monopoly's responsibility for distribution of petroleum products now that the NOC has been set up, partic- ularly if the proposed NOC refinery project goes ahead. 7.60 The present manpower situation in the coal industry in desperate. The continuous exodus from the mines and the recruitment difficulties reflect the working conditions and the lack of adequate financial and other material incentives. The work is arduous and unpleasant, living conditions are poor, and the mines themselves are generally in remote locations with difficult access. Despite this, miners' basic pay scales were until late 1977 no higher than those of other Government workers (although underground workers got a little more). In late 1977 the Government belatedly approved increases for miners of 10-15 percent above the current scales and this is to be supplemented through the distribution of WFP food and improved fringe benefits. It remains to be seen if this will be sufficient to attract people into the industry in the numbers required. 7.61 Training is a major lacuna in the present setup. Training arrange- ments in the coal and petroleum industries are plainly inadequate, particularly in relation to the ambitious output targets of the current Seven-Year Plan. Training facilities will be needed in connection with the proposed expansion of the Dare-Sauf and Sabzak coal mines, which will be based on the introduction of more modern coal-recovery methods. A training school, capable of training about 200 field workers annually, is an urgent necessity. (ii) The Electric Power Sub-sector (a) The System 7.62 Electricity supply in Afghanistan is only available in some 30 urban centers having a total population of 2 million of which only about 700,000 persons or 5 percent of the country's population have electricity. l/ Outside the main urban centers electricity service is limited to a few hours a day. Thus the rural population and most of the urban poor have no access to electricity. 2/ 7.63 The country's generating capacity totals 318 MW, of which 255 MW (or 80 percent) is of hydro type, 23 MW (or 7 percent) is diesel and 40 MW (or 13 percent) is of steam type. The limited power development to date has not required much transmission except for 110-KW lines in the Kabul and Kandahar regions. The only major thermal station is the USSR-financed, gas-fired, 3 x 12 MW Mazar-i-Sharif station in the north which supplies the adjoining areas and also the fertilizer plant. 1/ Assuming an average of 7 persons served per connected domestic customer. 2/ Although some villages in the Lashkar Gah area are beginning to receive supplies from the Kajakai station. - 160 - 7.64 About 60 percent of the country's generating capacity supplies the Kabul area as shown in the following regional breakdown. Table 32: ELECTRIC GENERATING CAPACITY BY REGION - 1976/77 Region 1976/77 Peak Load Generating Capacity MW MW Kabul 90.6 196.8 Kandahar 4.9 41.4 /a Mazar-i-Sharif 36.8 38.4 Chakcharan 9.4 20.1 Nangarhar 9.3 13.5 Herat 1.6 5.8 Sheberghan 1.3 1.5 Ghazni 0.1 0.3 Total 154.0 /b 317.8 /a The recently completed Kajakai station is only lightly used as yet. lb The 2/1 ratio of capacity to load points out the need for coordi- nated sector planning, consideration of regional inter-connections, combining public/private reserve capacities and various other measures that would ensure more effective use of resources. 7.65 Of the total generating capacity in the country (318 MW), 261 MW (82 percent) is operated by Da Afghanistan Breshna Moassessa (DABM), 43 MW (14 per- cent) by other Ministries and 14 MW (4 percent) by private autoproducers. The only available storage facilities on the over 90 percent hydro DABM system, are seasonal and annual storages at the Naghlu (Kabul) and Kajakai (Kandahar) stations, respectively. As a consequence the Kabul system suffers from inade- quate energy supply in a dry year (load shedding was necessary in 1974 for example), because there are no interconnections with other regional systems to permit energy transfers from thermal sources or from the Kajakai storage. In addition, in a dry summer the output capacity of the 66 MW run-of-river Mahipar station near Kabul is greatly reduced so there are also system capacity limita- tions. The 40 MW gas turbine project scheduled for installation in late 1977 is intended as a stop-gap measure to provide standby power until additional hydro (or possibly thermal) sources can be developed. 7.66 Da Afghanistan Breshna Moassessa, (DABM) is the most important organization in the power sector. It was formed as a government enterprise in 1966/67. Under its special charter, the organization was primarily respon- sible for construction and operation of electricity generation, transmission and distribution facilities. In April 1975, the Government set up a new department called the Water and Power Authority (WAPA), merging the country's - 161 - water resource development and power supply under a General President with the rank of a Minister. The new agency also assumed responsibility of DABM. In 1976, this became the Ministry of Water and Power, headed by a Minister, but with no basic change in its organization. 7.67 Until late 1977, DABM did not function as a utility, rather it has been run more or less like a goverment department. Operating efficiency has been alarmingly low, decision-making confined to the top Government levels and there has been no delegation of authority. In late 1977 DABM was made an autonomous organization with a General President as its head. It remains to be seen to what extent this will result in the necessary improvement. 7.68 DABM manpower totals about 4,900 of which 2,200 are permanent employees and 2,700 are temporary employees engaged on contracts which are usually renewable every year. About 10 percent of the'staff are employed at the Kabul head office, 28 percent in the Kabul regional operations and the remainder in the other seven regions. DABM's employees have hitherto been subject to the same constraints on salaries and working conditions as other Government officials. Salaries are tied to civil service scales and are low, ranging from $200 to $1,000 equivalent annually for those below Vice President level. This situation, coupled with the limited employment opportunities elsewhere in the country, has resulted in a serious morale problem in the power sector. 7.69 Until late 1977 DABM did not even have a barely satisfactory accounting system. Accounts, such as they are, have been compiled only for the first three years of its existence through 1968/69. However, under a technical assistance program financed by the Canadian International Develop- ment Agency, a basic accounting system has been established and the 1976/77 accounts are expected to be compiled before the end of 1977/78, although there is no timetable yet for compiling the accounts for earlier years. Mainly because of the high level of energy losses (which in 1971/72 were as high as 53 percent) and the low level of tariffs 1/, DABM has suffered heavy operating losses since its inception in 1966/67. At least half the energy losses were due to thefts and poor management practices such as inadequate metering and slack bill collection; however, through some effective measures taken by the organization, the energy losses which ranged between 40-53 percent in 1970/71 - 1974/75 were brought down to about 36 percent in 1975/76 and 32 percent in 1976/77. DABM has undertaken to bring these losses down to 20 percent of generation by March 20, 1981. With the 30 percent increase in tariffs from January 21, 1977 and the reduction in energy losses, it is estimated that DABM will be in the black in 1977/78 for the first time with an estimated net income of about Af 37 million; the rate of return would be a little under 1 percent. Table 33 summarizes DABM's sales and customer break- downs for 1976: 1/ There was a flat charge of Af 1 per kwh for all customers, except for the 20 percent of customers served by supply from non-hydro sources, which remained unchanged for over 20 years until raised by about 30 percent effective January 21, 1977. - 162 - Table 33: DABM - CUSTOMERS AND SALES, 1976 1976 Sales Average Annual No. of /a Gwh % Growth Customers % 1971-1976 1977 Domestic 148.3 29.2 15% 96,284 96.2 Industrial 265.9 52.4 26.7% 1,237 1.2 Government 93.2 18.4 5.2% 2,540 2.6 Total 507.4 100.0 17.4% 100,061 100.0 /a In addition, the few industrial autoproducers in the country supplied another 2,500 domestic consumers in 1977. 7.70 In the past, power requirements have been dealt with on a regional basis as a particular need arose on one of the isolated systems, or as a specific project was proposed by bilateral donors. This development pattern has resulted from a combination of the limited financial and technical resources available in the country, the relatively low level of power require- ments involved and the country's vast distances. Obviously sector development has suffered through this lack of a coordinated program and the absence of any standardization of technologies - 22 recent studies or projects in the energy and power field, financed from various sources, attest to the many agencies involved in the sector. (b) The Plan 7.71 The Seven-Year Plan (1976-1983) includes 32 ongoing or planned power projects costing a total of US$297 million equivalent. The studies for most of the major projects are only now getting underway. A capacity and energy balance for Afghanistan has been prepared (see Vol. II, Table 9.4), including interregional transfers where necessary, based on the Ministry of Water and Power investment program and the related capacity additions. The energy balance requires energy transfers to the Kabul region starting in 1982 from thermal sources in the Mazar-i-Sharif region and from the Kajakai hydro sta- tion. Possible storage sites exist on the Kabul River or its tributaries and these will be examined under a recently approved "Kabul River Basin Water Study". Once again, however, there may not be sufficient lead time to con- struct storage facilities to meet the 1982 needs after the study results are known, so additional thermal facilities or regional interconnections may be the only possible solutions for the Kabul region. The average cost of the investment program is $1,269/kW of incremental load (1975 to 1983) or $976/kW of added system generating capacity. These seem somewhat low for future systems and the investment program may not include sufficient amounts for distribution facilities. - 163 - (c) Future Development Needs 7.72 In many ways, Afghanistan has reached a critical turning point in the development of the electric power sub-sector. The renewed push towards economic and social development is bound to result in rapidly expanding demand for electric power. To ensure that electric power is developed in an efficient, rational and equitable way, attention will have to be focussed on three primary issues: expanded regional and rural electrification, least-cost development program and institution building. 7.73 Currently, less than 5 percent of the population have connections to electric power. Moreover, the current level of rural electrification is negligible, despite the many uses to which electricity could be put - pumping drinking water, irrigating land from tubewells or low-lift pumps, and threshing and milling, to name but a few. It would also serve to improve the standard of living directly through the provision of heat, lighting, etc. In its drive to develop the economy the Government is focussing on ensuring adequate power supply to planned new industries, without explicitly considering personal, particularly rural, needs. A start should be made in correcting-this balance by extending supplies to suitable rural areas as electric power facilities expand. To be optimal, a strategy of rural electrification would entail electrifying first those areas near the urban centers and industrial sites being developed (as is currently being done in the Helmand Valley), where the agricultural development potential is the greatest, and where population densities are highest. Such a strategy would be consistent with an efficient, cost-effective yet also more equitable strategy of national electrification. 7.74 The planning approach for both energy and power must be changed from a region-specific short-term basis to a national least-cost long-term basis. All energy resources and related costs should be fully catalogued so that appropriate policies can be developed, e.g., gas pipeline to Kabul versus coal development for domestic use versus electricity for home heating, etc. Incorporating these energy policy guidelines, a long-term power program should be prepared after appropriate technical and economic studies which would con- sider all possible alternatives, including (i) coal-fired stations at mines which could also provide power for national use, (ii) use of any economic hydro as a renewable resource to conserve other indigenous energy sources, (iii) regional interconnections where economic, keeping in mind the tech- nical difficulties of building transmission at 3,000 meters and with 3 meters of snow as would be necessary for some of the transmission paths, and (iv) residual-oil fired stations in conjunction with the country's future oil refinery. Also a specific strategy for the incorporation of rural areas into the expanding electric power distribution network should be developed. 7.75 The development of the power sector rests on the shoulders of DABM and WAPA. Continued effort must be made in strengthening them, including the following: establish an in-house training program; expand technical assistance beyond the ongoing accounting improvement work; accelerate DABM's reorganiza- tion; finalize DABM's charter; raise salaries to attract higher calibre staff - 164 - and bolster morale; improve maintenance programs to safeguard existing facili- ties; simplify administrative procedures to improve efficiency e.g., greater delegation of authority and responsibility; and improve in-house planning ability. These will not be an easy task, but given the sector's importance and potential it should be a matter of priority for the government. D. Rural Infrastructure 7.76 Rural infrastructure of every description is sorely lacking in Afghanistan. There are only some 17,000 kilometers of total roadway, of which over 9,200 kilometers are all-weather roads. These include the major highways, and the feeder road network which connects the provincial centers with these highways and with the capital. Less than half the total roadway is in the form of tertiary roads linking the vast rural areas with the main highways and towns. And much of the existing tertiary roadway is either seasonally impassable (in some cases even completely impassable as key bridges or precarious stretches of road have been washed away), or motorable by only the smallest, most maneuverable vehicles. 7.77 Village infrastructure is equally inadequate. Less than 1 percent of an estimated 20,000 villages have piped water or pumps (of which up to half are currently inoperable - see Chapter IX). Fewer villages still have electricity (at most a few dozen, all in the Helmand Valley), and none have telephone connections or postal services. Only 114 villages have health centers, and less than 10 percent have schools. Most minor bridges and irrigation infrastructure constructed by local villagers are of low durability and are regularly washed away in the spring floods and must be rebuilt. In many cases the crops lose vital spring irrigation. And even when in place, such infrastructure requires continual maintenance. 7.78 The development of rural infrastructure is the responsibility of several agencies, but by far the most important role is played by the Rural Development Department (RDD), which is responsible for bridges, irrigation structures and feeder roads. RDD's role is likely to expand rapidly during the Plan period and it is the only agency at present which is capable of bringing a coordinated view to the development of rural infrastructure. Other agencies include the Ministry of Public Health which is responsible for establishing health facilities and the provision of rural drinking water, the Ministry of Water and Power which is responsible for rural electrifica- tion, and the Ministry of Education which administers the rural school program. These other programs are discussed elsewhere in the Report. (i) The Role of the RDD 7.79 The minor civil works program concentrates on the construction of small-scale rural infrastructure usually designed to benefit a particular village or group of villages. Works include bridges and washcrossings, feeder roads and minor irrigation structures. The latter constitute about half of the projects and include intakes, flumes, siphons, and canal protection walls. Recently, Community Irrigation Schemes (CIS) have been added, the first two - 165 - of which have already been initiated. (Unlike the other irrigation schemes, these are expressly designed to bring water to the farmers' fields.) The feeder road program comprises the construction of small unimproved roads linking the villages to the woleswali centers and main roads. (Primary and secondary roads are the responsibility of the Ministry of Public Works). 7.80 With renewed political commitment since 1973 and projects that bring quick, tangible results to the rural population, this program is one of the Government's most popular; a backlog of over 600 projects exists. As a result, it carries one of the highest priorities and is one of the few departments with an open-ended budget - the Department can draw on as much as it can efficiently spend. Until 1975/76, RDD had usually only been able to spend abo-ut half its budget, mainly for procurement and organizational reasons. The situation has since improved dramatically; in 1976/77 RDD exceeded its enlarged budget allocation and the expectations are that it will do so again in 1977/78. 1/ The progress of recent years is reflected in the achievements. Construction increased from 20 structures in 1973/74 to 38 structures in 1976/77, with 93 envisioned for 1977/78. Also in 1977/78, 300 km of feeder roads will be constructed. Construction teams, formerly one of the key constraints, have also increased in number from 3 to 20 between 1974/75 and 1977/78. 7.81 The minor civil works program of RDD is the only government program in Afghanistan that is initiated at the grassroots. Village petitions are presented to the provincial RDD office for consideration. The office makes a preliminary feasibility study of the request, including an assessment of the likely village support for construction. On the basis of this, the Provincial Development Committee (i.e. Governor and RDD Director) decide on the project's suitability. The Governor and RDD Director are also entitled to include projects they deem necessary and appropriate. 2/ The suitable projects are then forwarded to Kabul for action. At this point, RDD in Kabul takes over the projects. 7.82 First, a team of four, including one engineer and three members from the Planning Department of RDD, make a socioeconomic feasibility study of all projects submitted that look reasonable, and decide on the types of struc- tures required. Based on this survey and consultation with the Governor and RDD Director, four or five projects are decided upon. A further team is then sent from Kabul to survey the sites and make the final technical assessment. Blueprints are prepared in Kabul over the winter, and a construction team sent out the following summer (or winter in some cases) - the team often camps out at the site of the project for several weeks. In the more accessible pro- vinces, projects can come to fruition within one year; however, cases of 1/ Like all government bodies in Afghanistan, RDD does not have a program budget, but budgets solely against line items such as salaries, construc- tion materials, fuel, etc. 2/ The result of this has been projects in or just beyond municipalities justified on the grounds that the major beneficiaries will be rural villagers. This is obviously far too liberal an interpretation of "rural beneficiaries". - 166 - projects taking four years to complete are not unknown. Often, lengthy procurement procedures, inadequate survey work, and lack of sufficient man- power and equipment, delay projects. Over the years 1974/76-1976/77, RDD surveyed 229 projects of which 212 were designed and only 106 have so far been constructed. 7.83 The projects themselves are partly self-help. People from the petitioning villages are expected to provide all the labor except that of the RDD construction unit, and as much of the construction materials as can be supplied locally. Either the village provides its own labor, or hires it from elsewhere. The latter would usually include skilled craftsmen such as carpenters and stonemasons, unless there happens to be one on the RDD con- struction team. There are three different arrangements for meeting the labor costs of the project. In the first case, the village supplies the labor without compensation. This would be done when the project is perceived to be of direct and critical importance to the village economy. In the second case, the costs of labor are met through WFP assistance. A food package worth Af 30-35 is given daily to the workers. WFP assistance would be used in projects located in the poorer areas where the going market wage rate is generally lower. It would also be used in other areas where the villagers are willing to contribute the cost of labor but not to the full extent of the market wage rate. The third case would be where RDD pays the full wage in areas where the daily rate is of the order of Af 50, such as Kabul, Parwan and Kunduz provinces. RDD is then compensated in turn by a USAID program termed the Fixed Amount Reimbursement (FAR) scheme, which disburses against work actually performed. There have even been projects in which all three systems have been used simul- taneously, the labor from the nearest village working for free, that from other relatively nearly villages for WFP, and that from the farther villages for cash (with FAR). 7.84 Wherever possible RDD teams visit several provinces on the same swing. In the more remote areas of Badakhshan, Bamian, Ghor, and parts of the north, RDD teams may come only once a year. This is due to the geographic isolation of these regions and the few months of the year when construction and survey- ing are possible. In the past RDD concentrated on the more accessible and developed provinces at the expense of the others. But there is now a serious attempt to bring the projects to every province, 5 per province per year. Prior to 1977/78 RDD had never had a project in Badghis province for example, but regularly had at least 5 each in Kabul and Parwan provinces. But of the 91 projects envisioned for 1977/78, 3 will be in Badghis, 2 in Bamian and 3 in Ghor, a significant improvement over the past. Nevertheless, there are still 6 projects in Kabul and 7 in Parwan. 7.85 The work program is divided between so-called winter and summer provinces. In the 20 summer provinces, all RDD field work is done during the summer months, while the design work is done in the winter when most engineers are confined to Kabul. In the remaining 4 so-called winter provinces, all in the south, winters are mild and do not interfere with construction; hence, construction in these provinces takes place only in the winter months, allowing maximum effort to be concentrated in the summer provinces the rest of the year. - 167 - 7.86 There are several minor programs which are unique in that they are executed entirely at the provincial level. Each provincial RDD office is allocated the funds and materials to undertake the construction of 40 standard sized culverts a year. Surveying and construction are done by the engineer and technicians attached to the provincial offices. For this purpose, each provincial office is allocated a truck, a cement mixer and a pump. Other programs managed either entirely or in part at the provincial level are the maintenance of RDD constructed roads, and the maintenance and cleaning of karezes in certain provinces. 7.87 Apart from the obvious logistical difficulties of monitoring and organizing construction, RDD faces several more serious problems. One is the maintenance and repair of existing structures and roads. Villages are supposed to maintain their structures but are usually unable to organize themselves to do so. For this purpose a maintenance section has been estab- lished by RDD in Kabul, whose purpose is to inspect all structures on an annual basis. Minor repairs are done by the provincial offices, major ones from Kabul. Every effort should be made to ensure that as much of this work as possible is done by the provincial offices. A novel scheme considered for the maintenance of roads is that of a caretaker system modeled after the mirab system for water canal maintenance (see para. 1.09). Other problems are less tractable and are endemic to Afghanistan. These include the antiquated and often irrational procurement system, and the bonded-warehouse system that makes removal from stores a complex, time-consuming operation. Currently all procurement is done once a year, forcing RDD to foresee its entire annual needs, something not easily done at present. (ii) RDD's The Seven-Year Plan 7.88 RDD has been given a large and varied program to undertake as part of the Seven-Year Plan. By 1982/83, the following construction program is to have been completed: (a) 225 bridges; (b) 6,720 culverts; (c) 160 community irrigation schemes (CIS); (d) 140 projects to reinforce canal banks; (e) 187 projects to rehabilitate and clear karezes; and (f) 2,373 kilometers of feeder roads. These projects are expected to require 3.8 million man-days, and cost Af 800 million in domestic resources. Foreign assistance of $4.99 million is also assumed to be forthcoming. Together these are to amount to about 0.6 percent of total development outlays. Although completion of this program would rep- resent a significant increase over RDD achievements in the past, it is not an - 168 - overly ambitious one, considering Afghanistan's rural infrastructure needs and improved RDD implementing capacity. Average annual expenditure during the Plan on small-scale rural infrastructure is projected to be Af 146 million, only 5 percent higher than the budgeted amount for 1976/77. 7.89 The RDD Plan calls for the construction of only 2,373 kilometers of tertiary roads, less than the amount of new or improved all-weather roads. Considering the low population density and low volume of traffic on Afghanistan's roads, a strategy that concentrates on lower-cost rural tertiary roads, such as those of RDD, makes better sense in terms of efficient resource utilization and expanded rural road coverage, than one which concentrates on the construction of the higher cost, underutilized, improved roads. As traffic grows on tertiary roads, they would be improved and maintained to higher standards. At some point, responsibility for these roads would shift from RDD to RCMD, who are better suited to carry out such tasks. Such a strategy of road development is not what is envisaged in the Plan. 7.90 Apart from the major rural irrigation projects being implemented by the Ministry of Agriculture, all irrigation infrastructure is the responsi- bility of RDD. Considering that practically every village is dependent upon water from some diversion structure or karez, that the most productive and important agricultural land is the irrigated land and that water-use efficiency is extremely low - a program of 2-3 irrigation projects and 30 water culverts per province per year is hardly commensurate with needs. In fact, these irrigation schemes have for the most-part high economic rates of return, especially when combined with the construction of feeder roads which permit farmers to market the additional produce. Hence, RDD should pay attention to the complementarity of its infrastructure development activities. 7.91 RDD also intends to undertake the intensive development of 18 woles- walis on an integrated basis. Theoretically, the line ministries would be responsible for schools, health centers, drinking water systems, and major irrigation development, with RDD assuming a coordinating role and the con- struction of feeder roads, culverts and small bridges, and many irrigation structures. The subject of integrated rural development has been discussed earlier in paras. 4.110 to 4.120. 7.92 The rural civil works program is one of the more impressive ones in Afghanistan at present. There is a degree of motivation which is all too rare in the civil service, particularly among the young men who camp out at the project site, far from their homes in Kabul, to oversee the work. The program seems to have evolved on a relatively sound institutional base. This is a cause for satisfaction because it is surely one of the central programs in Afghanistan's future development. The expansion which is envisaged in the Plan is nowhere near what is needed. There is some wisdom in not overloading a promising institution in what is still a relatively early phase of its development, but given the past achievement, a more rapid expansion can surely be envisaged. One way to do this might be to put more emphasis at this point of time on rural civil works, and to reserve the large-scale integrated rural development projects for those areas with the most urgent problems in terms - 169 - of absolute poverty, and relatively limited potential for development along traditional lines. Over the long haul, Afghanistan must develop a local administration which is capable of administering small infrastructure works with its own budget and staff. Once that is achieved, RDD will be able to move into the co-ordination of rural programs rather than focussing narrowly on infrastructure. For the present however, RDD stands alone in being able to carry out these works. It is forging genuine links between the vast majority of Afghanistan's population and its government administration. - 170 - VIII. EDUCATION AND MANPOWER 8.01 The education sector is a major participant in both the economic and social development of Afghanistan. Education plays a significant role in providing (a) productive skills at the different levels and for different sectors, that are necessary for the implementation of the development plans in agriculture, industry, health etc., (b) training in the maintenance of natural resources and physical infrastructure necessary for rural and urban develop- ment, (c) knowledge and skills to cope with the demands of development, such as written communication, banking, taxes, bureacracy and operating machinery, and (d) training for self-reliance in meeting basic needs in health, nutri- tion, civic participation and communication. This implies a broad approach to education in terms of both objectives and base, whereby ultimately all sections of the population must receive, within the constraints of resources, an adequate education to enable them to participate in the development process both as productive workers and as effective citizens. A. Development of the Education Sector 8.02 The formal educational system in Afghanistan was born in 1903 with the establishment of the first official school, Habibia, in Kabul. Prior to that, education was limited to the religious schools in which instruction was provided by the religious leaders (Mullahs) by methods of memorization and recitation. The curriculum was limited to reading the Koran and, at a later stage, some Dari language study. Students who wanted to pursue their religious education to become mullahs had to study further Arabic texts of the "Shariat" or Islamic law. The mosque school only used to run for the winter months when there was no farm work, and classes were held early in the morning and in the afternoon after prayers for a duration of 60 to 90 minutes. Because of the small number of students pursuing this kind of education and the informality of instruction, illiteracy was widespread. 8.03 In 1907, four years after the first official school was opened, a Council of Public Instruction was established to broaden and modernize the curriculum of the traditional schools. As a result, the primary school syllabus included reading, calligraphy, fundamentals of Islam and mathematics. In the 1920's the number of government schools increased to 13, all in Kabul, and the first Minister of Education was appointed. In 1931 the new constitu- tion made primary education compulsory but by 1932 total enrollment in all government schools was only 1350 pupils. By 1940 government schools had increased to 324 with an estimated enrollment of 60,000. That year the school curriculum was revised and Pashtu became the sole language of instruction until 1946, when Dari was allowed to be taught as a second language and later as a medium of instruction in Dari language regions. 8.04 Since 1957 educational development in Afghanistan has been con- sciously associated with the overall development of the country. Attempts were made to plan the growth of the educational system in harmony with the other sectors of the economy in the course of drawing up the four five-year - 171 - plans for implementation between 1957/58 and 1976/77. In addition to quanti- tative targets, the plans reflected concern for balance, quality and manpower needs. The First Five-Year Plan (1957/58 - 1961/62) stressed the supply of skilled manpower particularly as it related to rural development. Specific features of the plan included (a) a significant increase in the number of village schools, (b) introduction of manual trades and gardening into primary schools, (c) an increase in secondary school enrollment, (d) establishment of an agricultural-vocational training school and additional teacher-training and technical vocational institutions, and (e) initiation of an adult education program. The Second Five-Year Plan (1962/63 - 1966/67) de-emphasized primary education and village schools and stressed the development of high-level man- power by projecting a 130 percent increase in secondary school enrollment, and by expanding existing technical institutions and establishing new ones. In the Third Five-Year Plan (1967/68 - 1971/72) the question of "balance" was raised. It was pointed out in the introduction to the education chapter that "the objectives of a modern society are not restricted to the attainment of economic targets, but also include the achievement of political and social goals." Accordingly manpower considerations had to be balanced between one part of the country and another and a balance of enrollment between one level and another had to be achieved. Expansion of primary education was planned in parallel with expansion in secondary education and new educational institu- tions were proposed for the less developed provinces. In addition the Plan stressed qualitative improvement of the educational system in terms of comple- tion of school buildings, provision of teaching materials, reform of curri- culum, and modernization of teacher education. The same issue of "balance" was the focus of the Fourth Five-Year Plan (1972/73 - 1976/77) but more in connection with educational levels than with geo-demographic considerations. The major concerns of the plan were to strike a plausible balance between the expansion rates of the different educational levels, to halt the decline in the quality of education as a result of the over-ambitious expansion of secondary education, and to reduce illiteracy by spreading basic education. 8.05 When the degree of implementation of the targets of the plans was reviewed by a UNESCO mission, (Report EFM/65, January 1974) the following conclusions were reached: (a) Balance between educational levels. There was a remarkable growth of post-primary level education relative to primary level. While the targets for both levels in the plans were exceeded, the margin was far larger for secondary education than for primary education. The extent of fulfillment of plan enrollment targets for the primary level was 95 percent for the first Plan, 116 percent for the second and 102 per- cent for the third, while the corresponding fulfillment for the secondary level was 124 percent, 138 percent and 182 percent, respectively. (b) Geo-demographic balance. Inequality in primary level enroll- ment among provinces declined by 9 percent and in secondary level by 34 percent, during the Third Plan. - 172 - (c) Quality. Quality up to the beginning of the Fourth Plan had "almost certainly" declined. This was reflected in the com- parative rates of growth of enrollment and educational develop- ment expenditure. In constant prices, the Government invested 64 percent less in buildings and equipment per extra student in the third Plan than in the first. This affected the quality of certain key areas of instruction such as science and handicrafts. (d) Manpower needs. The order of importance of the types of spe- cialized training as revealed by enrollment, with agriculture at the bottom, was "doubtfully in true proportion to the development requirements of the country's largely agricultural economy." 8.06 Quantitative development of the educational system over a ten-year period from 1964/65 to 1974/75, (See Volume II, Table 12.1) indicates a clear bias in enrollment growth towards the secondary level. While the enrollment at the primary level doubled, the corresponding enrollment increased by five times at the middle secondary level and by twelve times at the upper secondary level. This led to a change in ratios between the three levels from 68:5:1 to 12:2:1. Enrollment in vocational education fell from 8.5 percent of total secondary enrollment in 1966/67 to 2.6 percent in 1974/75. During the same period, the proportion of female enrollment remained constant at the primary level (15 percent) but fell from 20 percent to 12 percent at the middle secondary level and from 24 percent to 11 percent at the upper secondary level, but increased from 8 percent to 13 percent in vocational schools. B. The Present System (i) The Organization of the System 8.07 The Government controls and administers all formal educational and training institutions and non-formal education schemes. The Ministry of Education is responsible for formal schooling from kindergarten through upper secondary. Private schooling represents only about 0.2 percent of primary and 1.3 percent of secondary enrollment. The Ministry of Education is organized under the Minister and two deputy Ministers into 13 presidencies and 5 general directorates, as shown in Volume II, Chart 12.1. Higher education is con- trolled and administered by the newly established Ministry of Higher Education. While the functional relationships between the two Ministries are being worked out, one of the first tangible outcomes is the transfer of the responsibility of pre-service teacher training to the Ministry of Higher Education while certain aspects of in-service training remain with the Ministry of Education. Similarly vocational and technical education is divided between the two Ministries depending on the level of training. Education is managed at the provincial level by Provincial Directorates of Education each headed by a Director and assisted by at least 3 inspectors and a supporting staff. 8.08 Until 1975 the educational system comprised a six-year primary cycle, a three-year middle secondary and a three-year upper secondary, and up to six years of higher education. These levels have been restructured under - 173 - the 1975 educational reform into kindergarten (1 or 2 grades), primary (8 grades), secondary (4 grades) and higher (2 - 6 grades). The structure of the educational system is shown in Volume II Chart 12.2 8.09 The school year is phased differently for cold (March - December) and warm (September - May) weather areas of the country. The school year is about 214 working days of which 10-15 percent is spent on an elaborate system of school examinations. Most of the urban schools at all levels operate on a double shift basis. 8.10 The two official languages of instruction are Dari and Pashtu. When one is the medium of instruction, depending on the language of the majority of pupils, the other is introduced as a second language in Grade 4. A foreign language (normally English) is introduced in Grade 6. The distribution of students between Dari and Pashtu at the successive levels is about 65 percent and 35 percent at the primary level, 60 percent and 40 percent at the middle secondary level and 55 percent and 45 percent at the upper secondary level. Of the students using Dari as a medium of instruction about 18 percent are females, while of those using Pashtu only 2.5 percent are females. (ii) Primary Education 8.11 There are two types of schools at the primary level: the "village" school and the "primary" school. While the regular primary schools function on the basis of one grade - one classroom - one teacher, the village schools are multi-graded. A one-teacher village school has the first three grades. When a fourth grade is added, it is promoted to a two-teacher school, and when further primary grades are added it is transferred into a three-teacher school. There are, however, some schools with fewer teachers than this formula allows. The Ministry of Education does not undertake to provide a building or to rent one for a village school. Most of the village schools are small and exist in communities where the population did not justify a full six-class primary school. In 1974 there were about 654,000 pupils at the primary level (78 percent of the enrollment of the whole formal system) of whom 21 percent were in village schools. The numbers of primary level schools, teachers and enrollments appear in Table 34 below. The intent of the govern- ment is to extend all village and primary schools through the eighth grade. In 1975, 308 village and primary schools throughout the country were extended to eight grades. - 174 - Table 34: PRIMARY LEVEL SCHOOLS, 1974 Type Schools Teachers /a Pupils Village 1,905 2,742 136,854 One-Teacher 1,380 1,380 77,456 Two-Teachers 143 279 13,453 Three-Teachers 382 1,083 45,945 Primary 1,468 14,873 517,355 Total 3,373 17,615 654,209 /a Teachers are actual numbers. Some positions in two- and three-teacher village schools are unfilled. 8.12 Primary school enrollment in 1974 represented about 30 percent of the total age group. The male enrollment represented 51.2 percent and the female enrollment only 8.6 percent of the corresponding age groups. In other words more than half a million boys and one million girls, age 7-12, were not in primary level schools (including village schools). The average pupil- teacher ratio was 50 in the village schools (56 in the one-teacher schools), and 35 in the primary schools. The distribution of teachers according to their qualifications appears in Volume II Table 12.14. About 60 percent of primary school teachers have professional qualifications while only about 43 percent of village school teachers have similar qualifications. Women con- stitute 18.3 percent of the total primary level teaching force, but only 1.3 percent of the village school teaching staff. 8.13 Since 1967 a team from Columbia University Teachers College with Afghan counterparts has been developing the content of the primary school curriculum and producing materials in an elaborate system of curriculum devel- opment. After a set of national goals and objectives was approved in 1970, a schedule of subjects was set including language arts (language, social studies and science), mathematics, physical education, art and crafts, and religion, for Grades 1-3, with the addition of social studies, science, practical work, health and a second language in Grades 4-6. For each of these subjects the scope and sequence of the course is developed, for review by an academic council. Then books are written, tried out for one year and revised. Once approved by a review committee they are typed in final form and distributed free to schools to be used for 2 to 3 years. So far, textbooks for Grades 1-3 have been printed and distributed. After the government's decision to. introduce practical subjects into Grades 7 and 8 the curriculum team has been asked to develop materials for about 50 vocational courses in a period of 1 - 2 years. The implementation of the curriculum is faced with a number of problems. First, the printing facilities are inadequate and the distribution techniques cannot cope with the volume of the materials. Secondly, the teachers are not trained for the new curriculum and the coordination with the ongoing inservice training programs is not adequate. There are workshops - 175 - conducted by the curriculum team for inspectors, provincial supervisors and headmasters who in turn will train teachers, but it is doubtful given the infrequency and short duration of these workshops that they will have any significant effect. Thirdly, the innovations in curriculum, particularly in science and practical work, are not coupled with the provision of sufficient instructional materials, which, added to the lack of teacher training, leaves instruction theoretical, teacher-centered and didactic. Fourthly, most of the school buildings are unsuitable and were not designed as schools. Prior to 1975 only 3 percent of the village school buildings and 18 percent of the primary school buildings were owned by the Ministry; in an additional 7 percent and 3 percent of cases, respectively, there were no buildings at all; and the remaining schools were housed in mosques, converted houses and stores. Since 1975 a major school-building program has been launched, but the backlog is so large that it will take decades before adequate facilities are available. (iii) Secondary Education (General) 8.14 Secondary education has been provided by middle schools (grades 7-9) and full secondary schools which combine middle and lycee schools (grades 7-12). The present trend, after the educational reform of 1976 and the exten- sion of primary education through grade 8, is to have one type of general secondary school covering grades 9-12. In 1974 there were 323 independent middle schools, 195 full secondary schools and 1 independent lycee in Kabul city. Enrollment was about 112,000 at the middle level, and 56,000 at the upper level. The enrollment ratios presented in Table 35 below indicate the heavy bias in favor of the male population. Table 35: SECONDARY LEVEL ENROLLMENT, 1974 Enrollment % of age group Middle Level Male 97,916 21.0 Female 13,773 3.0 Total 111,689 12.0 Lycee Level Male 49,686 11.9 Female 6,022 1.4 Total 55,708 6.7 8.15 In 1974, there were 2,424 teachers in the independent middle schools and 4,752 in the full secondary schools, leading to a low average student- teacher ratio of 16:1. The distribution of teachers according to their qualifications is given in Volume II, Table 12.15. There is considerable variation in the distribution between the two types of schools. While only 28.6 percent of teachers of middle schools have post-secondary education, about 48 percent have a similar qualification in the full secondary schools. It is also worth noting that 5 percent of middle school teachers have received - 176 - no more than a middle-school education, and 20 percent of the full secondary school teachers no more than general secondary-level education. Women consti- tute 3 percent of the total number of middle school teachers and 17.5 percent of full secondary teachers. Most of the women teachers are in Kabul city. 8.16 Prior to 1976, specialization into social science and natural science streams occurred only in Grade 12. With the elimination of the middle schools, such specialization will extend from Grades 10 to 12, where science students will study science subjects 55 percent of the time and art students will devote 15 percent of the time to science. However few schools have any equipment or facilities for actually implementing courses in these areas, and teaching iR general is restricted to the lecture-recitation method. (iv) Secondary Vocational and Technical Education. 8.17 Vocational and technical education is provided by 15 institutions (Volume II, Table 12.16) with an enrollment of about 7500 (1974). This represents less than 1 percent of the secondary level age group and 3 percent of secondary level enrollment. Enrollment of girls is about 13 percent, of the total, and is limited to two institutions. Enrollments by type of insti- tution are shown in Table 36 below. Table 36: ENROLLMENT IN VOCATIONAL SECONDARY SCHOOLS, 1974 Type of Institution Enrollment Technical 948 Mechanical and Craft 1,149 Agricultural 743 Commerce and Management 1,278 Other Vocational 369 Total 4,487 Note: Detailed data in Volume II, Table 12.16. 8.18 Technical training is available at three institutions (Volume II, Table 12.3); the Afghan Institute of Technology (A.I.T.), Jangalak Technicum and Balkh Technicum. The A.I.T., which was established in 1951, offers specialization in electricity and electronics, civil engineering, building construction, automotive mechanics, aviation mechanics, and machine tools. Although half of the time is designated for practical work, this is reduced due to the lack of sufficient equipment as a result of poor maintenance. The Balkh Technicum at Mazar-i-Sharif, which opened in 1971, offers courses related to the oil industry and the Jangalak Technicum, opened in 1974, offers courses in electromechanical fields. Skilled workers are trained in three Mechanical Schools at Kabul, Pakhtia and Kandahar. Courses are available as follows: Kabul: Radio, electrical power, automobile mechanics, building trades, mechanical trades; Pakhtia: Mechanical, electrical and automotive - 177 - trades, carpentry; Kandahar: Automotive, and mechanical trades. There are also craft schools that provide training in carpentry, building construction, weaving, press art and printing, ceramics and art, and tailoring. 8.19 Agricultural education is taught at only 3 agricultural secondary schools (grades 10-12): Baghlan, Lashkar Gah and Farah; enrollments total about 750 pupils. Entrance is based on achievement in the primary school- leaving examination and on availability of boarding places. Dropout rates average 32 percent over the three-year cycle. General subjects occupy about two-thirds of the curriculum; about five hours per week are spent in poorly equipped practical laboratories. An almost complete lack of agricultural texts in Dari or Pashtu hinders instruction. School farms are underutilized and little time is allocated for practical farm work in the course timetable. A project is presently under way in which the present schools are being expanded, remodelled and equipped, and 4 new schools are being constructed. Some classes in the latter schools are already in session. A new curriculum will be implemented which represents a major improvement over the existing one. Fifty-five percent of available time will be devoted to agricultural subjects compared with 33 percent in the old curriculum. The new curriculum provides for a common core of agricultural subjects in the first two years and for subject options in the final two years which include agricultural exten- sion and cooperatives, crop production, livestock, and farm mechanics. Each school will be provided with a school farm of 100 to 150 acres and about 66 percent of agricultural teaching time over the four years will be practical work on the farm, compared to less than 10 percent in the existing course. 8.20 Commercial and management education is provided by the Commerce Lycee, the Public Administration Lycee, and the Republican Lycee which is the girl's commerce Lycee and runs courses similar to it, with the addition of weaving, home economics and hygiene. The Ministry of Education runs a small Hotel Management School for hotel workers and tourist guides in a rented building. The Ministry also runs a Music School and a Physical Education School (Volume II, Table 12.16). 8.21 In 1974, there were 464 teachers in the vocational and technical secondary schools (Volume II, Table 12.17), resulting in a low pupil/teacher ratio ranging between 6.4:1 and 16.2:1. Less than 25 percent of the teachers had university degrees and the rest had an education equivalent to the level they were teaching in. In addition most teachers are not trained in pedagogy and practical activities, consequently equipment is hardly used and instruc- tion is highly didactic. (v) Other Formal Training Programs 8.22 A number of Government Ministries run training institutions to meet their particular needs. Among these are the Telecommunications School which offers technician courses in radio, telegraphy and carrier telephones for the Ministry of Communications, Afghan Air Authority and Radio Afghanistan. The Ministry of Defense runs the Military Engineering and Ordinance College in Kabul. - 178 - 8.23 A number of agriculture training institutions established several years ago (Animal Health and Production Institute; Project on Agricultural Credit and Related Service through Cooperatives in Afghanistan (PACCA) Train- ing Institute) have been merged recently with the Institute of Higher Agricul- tural Studies (IHAS). The Institute has an enrollment of about 200 students in three areas: veterinary science, credit/cooperatives, and forestry. Entrance is highly competitive but the drop-out rate is also high (38 percent). The curriculum spans five semesters with about one semester devoted to field work. The physical facilities are very inadequate with no equipment or farm laboratory land available. 8.24 The Ministry of Public Health has five training institutions to meet its own manpower needs: (a) School of Nursing with an enrollment of 320 students and an average annual output of about 50 graduates; (b) Higher Insti- tute for Assistant Pharmacists with about 50 students enrolled in a two-year course; (c) Higher Institute of Technology offering a two-year course with an enrollment of about 40 students; and (d) Institute for Dental Medicine with an enrollment of 30 students. These institutions are staffed by 54 trainers including doctors, pharmacists, technicians and medical workers. (vi) Informal Training Activities 8.25 Government ministries and state enterprises organize, on an ad hoc basis small training schemes for their own employees. Departments in the Ministry of Agriculture, for instance, have offered in past years short train- ing courses in the fields of irrigation, forestry, animal diseases, animal care, audiovisual techniques, fruit and vegetables, cocoon raising and bee- keeping. The Paktia Development Program is an example of the provision of informal training for immediate needs. The Program includes a project for the development of small industries and handicrafts, which although it is production-oriented offers training opportunities in crafts. In addition, the Paktia Development Authority has trained farmers' guides and organized meetings on modern methods of agriculture and forestry. (vii) Teacher Training 8.26 There are nine institutions for teacher training, eight primary teacher training institutes (DMA's) and one Higher Training College (HTC). Preservice training of primary teachers (Grades 1-8) is provided in a one-year course at grade 13 level at the DMA's and the training of secondary school teachers is offered at Grades 14 and 15 at the HTC and some DMA's (see Volume II, Table E3). Both courses cover academic and professional studies. Provi- sion is made in the two-year course for specialization in one of the following streams: Mathematics/Physics; Chemistry/Biology; Dari/English; Pashtu/English; and History/Geography. In the new reform, primary teacher training will be of two years duration in Grade 13 and 14 while secondary teacher training will be of four years duration from Grades 13 to 16. A preinvestment study has been proposed for the construction of five new regional teacher institutes with a total capacity of 2400 places. - 179 - 8.27 Inservice training is provided in the same institutions either as a parallel program (Grades 13-15) for teachers who have completed Grade 12, or as an upgrading program (Grades 10-12) for those who lack academic qualifica- tions. The upgrading program is a combination of professional courses given at the DMA's and regular academic subjects given at the Lycees. In 1975 there were 1232 students enrolled in the preservice program and 2801 in the inservice courses (Volume II, Table 12.3). The proportions of women in the two programs were 3.6 percent and 31.7 percent, respectively, 8.28 The teacher training institutes have adequate accommodation facili- ties for about 1,000 men in total. The educational facilities, however, are poor, equipment is minimal and what is available lacks maintenance. The institutes are not equipped for training in manual or traditional crafts or agriculture. The curricula are now being revised to place more emphasis on these subjects in accordance with the shift in emphasis in the curriculum of Grades 7 and 8. Practice teaching is conducted in laboratory and regular cooperating schools in the vicinity of the institutes. 8.29 Most of the teachers at the training institutes are university graduates about half of whom had their professional training at the Academy for Teacher Educators in Kabul (Volume II, Table 12.3). The Academy provides a nine-month course at the 17th grade level in elements of educational psych- ology, methodology, tests and measurements, and special methods of teaching. It is presently housed in old residential premises with inadequate equipment. A pre-investment study is to be undertaken for the design of a new complex to house the Academy with the HTC and DMA of Kabul. 8.30 Training of vocational and technical school teachers is provided at the university level. The Faculty of Engineering has a limited program for the preparation of teachers for technicums and mechanical and craft schools. The Faculty of Agriculture has a special department to prepare teachers for the agricultural secondary schools. The Ministry of Education, in collabor- ation with the Ministry of Agriculture is instituting a nine-month agricul- tural education program at IHAS with 40 percent of instruction time spent on secondary-level agricultural and adult education teaching methods, 30 percent on technical-practical agricultural instruction and 30 percent on development of instructional materials. In addition, 40 fellowships to the U.K. will be available for training in technical education. (viii) Educational Materials and Services 8.31 The Education Press, within the Ministry of Education, is the only printing facility (government or private), which has the equipment and expertise to print textbooks and teaching materials in Dari and Pashtu. The present need is for an annual production of over three million books, which will increase to about eight million by 1982. Nearly 40 of the technical staff of 190 have received regional training fellowships in Tehran, two have been trained in Germany and the remainder were trained on the job. The inade- quate storage and operational space makes assembly-line procedures inefficient. Most of the machinery is more than 20 years old and insufficient to print the volume and variety of material required. Bindery facilities are virtually - 180 - non-existent, and reliance on manual labor has created a backlog of nearly two million volumes. Paper supply, storage and control need to be improved. Lack of storage, complicated recording procedures and inadequate distribution facilities, both in Kabul and regionally, hamper distribution of completed materials. A project financed by the Canadian Government will be directed at upgrading the present facilities. 8.32 The Educational Broadcasting Center produces two half-hour broad- casts (in Pashtu and Dari), per week to assist primary school teachers. A staff of 17 qualified teachers develops scripts and prepares prerecorded broadcasts. The Center is faced with the need to take a number of actions to overcome the many problems it faces. These include improved reception in some areas, repairs to many of the 1,200 school receivers, effective liaison between curriculum writers and broadcasters, easing of budgetary constraints, increasing radio time through Radio Afghanistan and the development of a dynamic, long-range plan for school broadcasting. The present accommodation in residential buildings lacks adequate heating while technical equipment is barely sufficient to meet the present output. 8.33 The Audio-visual Production Center, with a total staff of about 60 teachers and an annual budget of over Af 2.7 million, operates in inade- quate, unsuitable and condemned buildings. The photography section produces black and white filmstrips and slides, distributes materials from its library and repairs radio and projection equipment. The work of the production unit includes making science kits, mathematics kits, blackboards, chalk and social studies maps. Improved coordination is needed between the curriculum developers and the production workers, Evaluation of the classroom use of such materials is essential, as is the need to expand and link the operations of the Center with other service units and teacher training facilities. 8.34 The Science Center revises textbooks, conducts workshops as part of in-service teacher training programs, and produces science and mathematics kits for both teacher demonstration and pupil use in secondary schools. During 1975, revisions were made to textbooks in arithmetic, physics and biology at four grade levels. Over 500 teachers were enrolled in 12 in- service training workshops, only two of which were held in Kabul. The Center has produced and distributed nearly 150 science and mathematics kits to all provinces. Accommodation is extremely' limited in small, unsuitable buildings. Mechanical equipment is meager, with the result that output is improvised and often roughly finished. Kits are made from scrap metal and wood, with the intention that they can be reproduced by innovative teachers in the schools. (ix) The University of Kabul 8.35 The University of Kabul has an enrollment of about 12,000 students 10 percent of whom are women. In addition to free tuition all students receive a monthly allowance of about Af 250 and about 7,000 students are boarders (boarding is free for those from out of Kabul). The intake and out- put of the faculties of the University are shown in Volume II, Table 12.4. The growth in enrollment has been fastest in the Faculty of Engineering (from an intake of 250 in 1976 to 1053 in 1977). Degree courses are of four years - 181 - duration, except in the Faculty of Engineering and the Polytechnic where they are five years and in the Faculty of Medicine where they are six years. Courses are organized on semester basis. Dari is the main language of instruction though fluency in Pashtu is also required of teachers and students and other languages are used in individual faculties according to their affiliation with bilaterial aid agencies (i.e. English in the USAID-assisted faculty of Engineering, Russian in the USSR-assisted Polytechnic, German in the FRG-assisted Faculty of Economics). 8.36 Admission to the University is on the basis of a competitive exam- ination. Candidates are then assigned to the different faculties on the basis of their grades. Places for each faculty are determined by the Ministry of Planning. In 1977, 3,369 students were admitted while the total number of secondary level graduates was about 15,000. The University is well provided with physical facilities but there are not enough dormitories. While the older faculties are well equipped, the new faculties like veterinary science lack the necessary equipment. Of the teaching staff of 758, 15 percent hold Ph.D's while 35 percent have Master's degrees and 50 percent Bachelor's degrees. (x) Non-Formal Education 8.37 Adult education and literacy programs are directed by the National Directorate of Adult Education. Programming in terms of planning, curriculum and materials development, and training for field operation is done at the central level while the non-formal education activities are administered locally by provincial directorates. The programs are presently addressed to four priority groups: (a) farmers; (b) cooperative members; (c) women; and (d) new urban residents who due to migration from rural areas face problems of adjustment. The first two programs are of six months' duration and the last two of nine months' duration. Each program starts with a literacy part con- sisting of 25-30 sequences that require 300-350 hrs. On top of this is built a functional education program that varies with the different target populations. There are presently about 13,700 male learners grouped in 6.39 sections and about 900 women in 37 sections in six provinces. Classes are taught by full- time instructors with secondary level education. The Government plans to extend these activities to all provinces and by 1983 have an enrollment of 60,000 men and 12,000 women in 4,600 groups. At the same time the Afghan Women's Welfare Society, a semi-autonomous organization responsible directly to the Minister of Education, undertakes training and literacy activities for adult women, and conducts vocational courses in social services, home economics and secretarial skills. (xi) Education Finance 8.38 Total Government financing (ordinary and development) of the Ministry of Education and Kabul University increased from Af 931 million in 1971/72 to Af 2371 million in 1977/78, a nearly 155 percent increase in monetary terms. The proportion of the total Government ordinary budget spent on education has ranged between 15 and 18 percent during this period. At the same time the proportion of the total development budget allocated to education has steadily - 182 - increased from 1.7 percent in 1971/72 to 3.3 percent in 1975/76 and 5.5 per- cent in 1977/78. The proportion of GNP devoted to education is less than 2 percent which puts Afghanistan in the lower quartile of developing countries. The proportions of expenditure devoted to primary, secondary, vocational and higher education appear in Table 37 below. Table 37: BUDGET ALLOCATIONS TO EDUCATION 1971/72 TO 1977/78 (in percentage) Level Recurrent Development Primary 37 42 Secondary 24 7 Vocational 14 12 Higher 16 39 The difference in proportions between the two types of budgets is accounted for by the rapid expansion in primary school construction and the ongoing construction program at Kabul University. C. Major Issues in the Educational System 8.39 In spite of the high degree of fulfillment of the quantitative targets of previous plans, and the numerous attempts at qualitative improve- ments, the present system of education and training is still faced with serious issues and problems. Some of these issues are a result of previous strategies and other are inevitable consequences of the rapid quantitative expansion. The major issues are in the following areas: (i) Planning and Management 8.40 There are four major issues in the administration of the educational system; (a) at the central level development responsibilities are fragmented. For instance, curriculum development and implementation is carried out by a number of departments with little coordination and synchronization. This has led to cases in which a new curriculum is implemented before the necessary textbooks and aids are produced and the teachers reoriented; (b) Education planning is weak overall due to the shortage of qualified staff and the low priority which is accorded to this function. Many of the other problems which are listed below have their roots in the inadequacy of educational planning; (c) while the data-collection function of the Department of Planning is well developed, the research function has never been actually activated, partic- ularly in areas related to policy and decision making. Moreover, the status of the Department of Planning at equal level with other Departments prevents it from being effective in monitoring implementation; (d) At the provincial level the educational administration structure is too weak to effect any meaningful regionalization of implementation, supervision, and feedback. - 183 - (ii) Efficiency 8.41 The efficiency of the educational system is very low. Dropout and repetition rates (See Vol. II, Table 12.5) are very high at the secondary level and after Grades 4 and 5. High dropout rates mean that a large amount of the ordinary budget is spent on those who fail to complete their present level, particularly those who drop out before the minimum for permanent literacy was achieved. Heavy dropout rates also contribute to under-utilization of avail- able space, which is shown in the decrease in class size in successive grades within each cycle. The very high repetition rates mean that many students stay in school longer than the normal duration, thus depriving other children of access to education. On the basis of repetition rates per grade and the age-grade enrollment distribution (Vol. II, Chart 12.3) it can be seen that in 1974, more than 140,000 primary places, 32,000 lower secondary places and 13,000 upper secondary places were taken by laggard students. In other words, if it were not for the shortcomings in internal efficiency, the age-specific enrollment ratios at each educational level could be increased by about 20 percent with no additional physical facilities. 8.42 Repetition and dropout increase the cost per student. The calcu- lated rates for Afghanistan roughly indicate that more than 15 pupil-years were invested per successful completer at the primary level and not less than 20 student-years at the secondary level. In other words, due to internal inefficiency a high proportion of the ordinary budget is wasted. A major reason for the high dropout and repetition rates is the examination system. The "free-answer" nature of the questions and the unstandardized scoring scheme, make these examinations subjective and of very little value for diagnostic or evaluative purposes. Since they are only used for promotion decisions, students, teachers and parents view them as an end and passing them justifies any technique used by the students to achieve the end. The system puts a great deal of power in the hands of teachers, who have tended to use it in a negative fashion to restrict the number of promotions. A system of automatic promotion for the first three grades was tried earlier and abandoned within the context of a grade-oriented curriculum and evalua- tive examination. Other causes of dropouts and repetition are related to the low quality of educational methods and materials and unsuitability of the curriculum. 8.43 Many of the reasons for high dropout rates are external to the edu- cation system. Economic necessity often leads parents to withdraw their children from classes. These are very difficult problems to tackle. The Government has taken steps to permit children to assist their parents at harvest time through varying vacation dates. These are now at the discretion of provincial Governors and Directors of Education. Closer proximity of students to schools will also help, but here it should be noted that the pro- posal to consolidate primary schools will aggravate the problem. There are no easy answers to the question of how to reduce the drop out rate and increase overall enrollment. In order to find out it might be appropriate to select one or two provinces for intensive education development, with careful school map- ping and the adoption of pilot schemes such as school-feeding, modified exam- ination systems and possibly some experimental scholarship schemes directed at the very poorest groups. - 184 - (iii) Equity 8.44 Educational enrollment rates exhibit disparities by sex, region and urban/rural location. Custom and social pressure militate against the enrollment of girls. The female age-specific enrollment rate is 8.6 percent at the primary level, 3 percent at the lower secondary level and 1.4 percent at the upper secondary level. The variation in educational opportunities among provinces is also high as seen from the representation indices in Vol. II, Table 12.2. These differences increase with each successive cycle. The Government is focussing on the issue of regional disparities in education, and in future, projections of enrollment will be carried out by province. Rural areas also have lower quality of education in terms of availability of materials, trained teachers, and physical facilities. These factors have generally resulted in higher dropout and repetition rates for females and rural areas. A large part of the problem of increasing the enrollment of girls in the rural areas, is the shortage of women teachers. Provincial quotas have now been established at the Kabul HTC for women, but in the longer run it will be necessary to have adequate facilities and dormitories at the provincial institutes. Only the institute at Balkh has a dormitory for girls. The proposal for an intensive education project in 8.43 above should include pilot programs to train women teachers and increase female enrollment. (iv) Productivity 8.45 General secondary schools have tended to concentrate on educating students exclusively for University entrance, yet more than half of the students terminate and enter the labor market with little relevant preparation for work or adult life. The same applies to school leavers at the end of the primary level. Vocationalization of Grades 7 and 8 may have no impact at all, unless a task-oriented curriculum is developed accompanied by provision of adequate equipment, facilities and teachers. School leavers at earlier stages lack not only skills but the minimum literacy level for retention. 8.46 The productivity of the training system has been low because firstly it presumes that the labor market is highly structured while only a small segment is. Secondly, it is assumed that most students trained in specialized institutes terminate their studies and join the labor market according to a manpower supply-demand scheme, while in practice large numbers of graduates of secondary technical and vocational schools go on to further education. Thirdly, graduates of training institutes receive inadequate training in practical subjects and are thus ill-prepared for the labor market. (v) Quality 8.47 The effectiveness of the educational process depends upon many factors including physical facilities, equipment and teaching materials, methods of teaching, examinations, and perhaps most importantly, teachers. The existing system has weaknesses in all of these areas. According to the Seven-Year Plan (reflecting conditions in 1975) "2,342 schools, which form 69.5 percent of all schools, lack proper buildings which in view of the climatic conditions of the country, has been instrumental in the lowering of - 185 - educational standards." More serious is the inadequate provision and distri- bution of equipment, textbooks and teaching materials, in spite of the active attempts of the Ministry of Education (paras. 8.29-8.32). The few laborato- ries which exist suffer from lack of maintenance and availability of supplies. Consequently most of the classroom time is devoted to lecturing, reciting and notetaking. 8.48 A major weakness of the curriculum is that it is subject-oriented and designed from the top down with no flexibility to accommodate different community needs and target pupil populations. Similarly, the vocational and technical curricula are subject-matter materials rather than skill and task- oriented with a specialized mode of delivery and evaluation. Teacher qualifi- cations have been inadequate both in terms of their formal levels of attain- ment and in professional training, (paras. 8.12, 8.15, 8.21). On-the-job professional help cannot be expected from supervisors who have a large number of schools to cover and who are not completely attuned to recent developments in education. The Government is aware of the deficiencies in the present curriculum and has taken some useful initial steps toward increasing the community orientation. These include a new emphasis on the teaching of hygiene, the use of local materials and methods, and the teaching of practical arts in grades 4-6. Obviously the constraints mentioned above of facilities and teaching skils, hamper these programs, but they do suggest that the think- ing is along the right lines. D. Educational Policy and Strategy (i) Characteristics 8.49 The educational authorities have repeatedly expressed their aware- ness of the gravity of the problems and weaknesses in the educational system. In an attempt to solve these problems the Government drew up an educational policy which became the basis for the initiation of "The Education Reform" of 1975 and the strategy of educational development in the Seven-Year Plan. The basic objectives of the Education Reform are: 1/ "a. To better the quantity and quality of education by means of reform- ing its structure and to create conditions for its better organi- zation and coordination. b. To adopt manpower training (related to) requirements. c. To prepare ground for the acquisition of permanent literacy during the period of primary education." 8.50 The strategy that was developed to achieve these objectives can be summarized as follows: a. Primary education is extended from six to eight grades and is in principle considered compulsory and free. 1/ Source: Education Policy Statement, 1975. - 186 - b. Practical subjects will be introduced into the curriculum of Grades 7 and 8. c. Promotion to the secondary cycle will be regulated by a com- petitive test. Those who do not pass it will form an important part of the labor force as unskilled literate workers or as skilled literates after a short-term special vocational course. d. The two secondary cycles will be consolidated into a single cycle of 4 years, and the intake into the academic and voca- tional specializations will be balanced so that ultimately 50 percent of secondary education will be vocational. e. The primary teacher training program will be extended from one to two years (post-secondary) and the secondary teacher training program from two to four years (post-secondary). Ultimately, the Government intends that primary school teachers should be holders of Bachelor's degrees and secondary school teachers should be holders of Master's degrees. f. To improve the quality of education the curriculum will be revised, textbooks will be developed and the student/teacher ratios at the different levels will be reduced. 8.51 In higher education the strategy comprises (a) adjustment between supply and demand, (b) commitment to employment of university graduates, and (c) substantial increase in enrollment in technical fields. (ii) Analysis of Present Strategy and Plan 8.52 Basic education is given high priority in the Seven-Year Plan as an important factor for "the spread of literacy, economic development and modernization of the country's social structure. It is also regarded as the first step towards affording all members of the Afghan society equal opportun- ities." (Plan p. 210). The Plan envisages an improvement in the delivery of basic education in terms of (a) lowering school starting age gradually from 7 to 6 and instituting kindergartens, (b) merging several village schools into an eight-grade primary school or merging several village schools with a six- grade school which will then be transformed into an eight-grade school, (c) lowering the student/teacher ratio from 43.8 to 26.8, (d) reducing the male/ female ratio from nearly 6 to 3 and (e) paying due attention to geographic and demographic equilibrium and to wastage in the system. Subsequent to the publication of the Plan further analysis carried out by the Ministry of Educa- tion has led to their proposing less ambitious targets for female enrollment (a reduction in the male/female ratio from 6 to 5 instead of 3) and the teacher/student ratio (from 43.8 to 35 instead of 26.8). The plan targets are shown in detail in Vol. II, Table 12.6 and are summarized for all forms of education in Table 38 below. - 187 - Table 38: SUMMARY PLAN TARGETS Enrollment ('000) Year 82/83 Year 75/76 1975/76 1982/83 as % of as % of Year 75/76 Year 68/69 Primary 789.1 1280.0 162.2 157.2 Secondary 89.7 148.1 165.1 372.2 Vocational 4.0 40.4 1010.0 173.9 University 8.2 11.3 138.0 76.1 8.53 While the present primary school system is plagued with limited horizontal access to education with one of the lowest enrollment ratios in the world and with very high wastage, the adopted strategy and projected plans do not seem to improve the situation. Instead of widening the base of scholari- zation by expanding enrollment, the Plan calls for an investment of the country's limited resources in a vertical expansion of the primary school system, KG on one side and Grades 7 and 8 on the other. Although such an expansion would increase the age-specific enrollment ratio to about 40 per- cent, an alternative of horizontal expansion of a six-year cycle would lead to an age-specific enrollment ratio exceeding 50 percent within the same period of time, and a larger number of primary level schools that can have wider dis- tribution, and consequently, a positive effect on the index of equity. If the funds for the establishment of KG's, (Plan Annex Table 92) are diverted to the expansion of primary education, 21,000 additional places could be provided. The vertical extension of the basic education cycle makes the system more expensive, because firstly there is research evidence that the lengthening of the cycle correlates positively with dropout rates, and secondly, plans for universal basic education become financially prohibitive to implement due to the compounded cost per successful completer of eight grades. 8.54 The rationale for the extension of the basic cycle is the assumption that children need at least eight grades of schooling to become permanently literate. This ignores two fundamental points about the determinants of achievement and the meaning of literacy. First, what a school system provides within a certain set of grades or years is much more important than the number of years. An investment of a small percentage of the cost of adding two more grades to improve the quality of the primary schools or even the village schools would lead to a more definite improvement in educational outcomes. Moreover multigraded schools, run properly, have proved to be as successful as the traditionally structured ones. Secondly, literacy retention involves continuous use of the acquired skills. In settings where reading and writing are not used, even seventh and eight grade graduates would probably soon lose such skills. On the other hand, if the communications infrastructure in Afghanistan is developed to demand the use of literacy skills, even children with fourth grade level will be encouraged to use and develop these skills. - 188 - 8.55 The vocationalization of Grades 7 and 8 to provide "better employ- ment conditions" for graduates, although significant in itself, may not have the desired impact on production. Less than one-third of primary school-age children are in school and when the net enrollment ratio is adjusted for repetition and over-age, the proportion drops to less than one-fourth. Of those about 40 percent complete the six-year cycle and only half of the completers will be allowed to enter secondary schools. Thus all the invest- ment is geared to the 15 percent of the corresponding age group who reach the seventh and eighth grades and the maximum 7.5 percent who will be allowed to continue their education. 8.56 .The original Plan proposal to reduce disparity in enrollment between boys and girls by raising the enrollment ratio from one girl to nearly six boys to one girl to three boys was commendable. However this increase in the female school population would have virtually exhausted the planned increase in the enrollment ratio and would have left the percentage of boys in school nearly constant. Moreover enrollment of girls in school is not a matter of availability of places but is deeply related to relevance of curriculum, social attitudes and parental awareness of the need to educate girls. The more realistic proposal put forward by the Ministry of Education to raise the ratio to one girl to five boys should be attainable if the necessary training of women teachers is carried out and the necessary political support at both the national and local level is forthcoming. 8.57 While the Plan assumes that a reduction in the student/teacher ratio "will be indicative of improvement in the educational quality," this assump- tion is not supported by research findings. On the contrary some studies have shown that certain skills, especially reading, are better achieved in large classes. Small classes in themselves do not guarantee an improvement in the teaching-learning process such as individualization of instruction and activity-oriented learning. What is more important than class size is what the teacher does with the opportunities the size of the class offers. The scope of effective ways of teaching in relatively large classes has not been exhausted. It would be pointless to decrease class size so that teachers can lecture and dictate to smaller groups of students, when the increase in cost is tremendous. The original proposal to reduce the student/teacher ratio from 43.8 to 26.8 required an additional 18,475 teachers over the 29,225 teachers needed otherwise (Vol. II, Table 12.6). Aside from the question of the feasibility of providing these large numbers of teachers (see para. 8.61 below) the recurrent budget would have had to be increased by more than 50 percent since salaries of teachers constitute the major part of it. The new proposal to reduce the ratio to 35, while more practical, would still not adequately address the problems raised above. 8.58 "To spread literacy and extend equal opportunities", a rethinking of the strategy for basic education is needed, in terms of substance rather than form, which will be accessible and relevant to a wider group of the population, through the adoption of a community-based curriculum. Such a curriculum should be derived from the personal and economically productive needs of the community and sensitive to the differences in such needs among sexes and regions. The quality of education should be judged in terms of the - 189 - relevance of what children learn to their lives after leaving school rather than how many pupils reached the eighth grade. It is also recommended that such a curriculum be coupled with the development of an evaluation scheme that is diagnostic in nature and which could lead to the possibility of reintro- ducing some sort of an automatic promotion system at the early grades to reduce wastage due to dropout and repetition. 8.59 At the secondary level the Plan tries to make up for the previous imbalance between academic and vocational education, by imposing a moratorium on the number of general secondary schools and proposing a large increase in vocational schools. By the end of the Plan the ratio between enrollments of academic and vocational high schools will be 3.6:1 compared to a ratio of 25.3:1 in the first year of the Plan. According to the targets in Vol. II, Tables 12.6 - 12.10, there will be, during the period of the Plan, 314,500 eighth grade graduates of whom 67 percent will enter general secondary schools, 16 percent will enter vocational schools, and the remaining 17 percent, i.e., more than those to be prepared vocationally, will enter the labor market. The Plan proposes six-month to two-year training courses for this last group of school leavers within the framework of vocational education and partly under the training programs of industrial organizations. It is worth noting, however, that such a proposal nearly doubles the load on voca- tional schools in terms of space, teachers and budget, and the Plan makes no provision for such a load. 8.60 The small quantitative increase at the general secondary level is accompanied by attempts to improve the quality of education by providing textbooks and science laboratories and reducing the average number of students per teacher from 35 to 30 "as a consequence of which, the quality of teaching will go up" (Plan p. 213). Once more the reduction of the student/teacher ratio is not strongly supported on educational grounds, while economically it costs the system an extra 1700 teachers during the Plan period with obvious implications for training and recurrent expenditure. It is also important to note that the qualitative improvements are along conventional lines and based on the assumption that this kind of education is university-oriented. The facts are different. During the seven-year period of the Plan 139,000 students will graduate from the general secondary schools and 18,900 from the vocational schools (Vol. II, Tables .12.7 and 12.8). During the same period entrants to Kabul University are 19,900 and the Teacher Training Colleges 43,200. Even if it is assumed that no vocational school graduate enters the University or College, and at the same time the over-ambitious targets for the Teacher Training Colleges at a post-secondary level are accepted 1/, then half of the general secondary graduates (three times the number of graduates of vocational 1/ Enrollment target figures for the DMA's are assumed to be at the post- secondary level although there is ambiguity in the Plan regarding the time schedule for the implementation of the upgrading of the teacher training program (para. 8.50e) and the grade level of the entrants to the DMA's during the period of the Plan. - 190 - schools) will still enter the labor market with university-oriented prepara- tion and no training. Thus there is a need to rethink the role of general secondary schools and restructure and diversify the curriculum to cope with the needs of the growing numbers of graduates who will not go into higher education. 8.61 During the Seven-Year Plan, vocational education is to be expanded nine-fold by opening new schools and increasing the capacity of existing ones. In the distribution of facilities by subject of specialization (Vol. II, Table 12.8) agricultural education is not treated in proportion to its importance in the economy, and the bulk of the expansion (48 schools with additional enrollment of 26,200 students) is in areas that "will be determined after appropriate studies." The number of teachers needed will increase from 114 to 1,224 with the annual increase reaching 324 in 1982/83. Considering the number of graduates from Kabul University during the years of the Plan (Vol. II, Table 12.13), it will be virtually impossible to provide for such an increase in the teaching staff. Moreover, the enrollment targets are not realistic because there is insufficient allowance for the time needed to build and equip the schools proposed in the Plan. 8.62 The strategy for vocational education in the Plan is based on (a) the development of a small number of specialized persons who will generate development at the top, largely within heavy capital-intensive industries which the government will initiate, and (b) the feasibility of establishing a formula of correspondence between curriculum specializations and various manpower demands of the modern sector of economy. The market for skilled manpower in a number of subsectors is very small which raises questions regarding the mode and scope of middle- and high-level manpower training. Moreover the major share of development expenditure is in areas which are relatively capital-intensive and which will use a small number of workers. If the Government persists in this employment policy, and at the same time pursues a development policy which is not geared to the generation of mass employment, then vocational education needs to be flexible both in terms of its structure and mode of delivery. 8.63 The Seven-Year Plan recognizes the importance of high quality teacher training in the implementation of educational reform, but the concept of quality, as in the case of the strategy for basic education, is expressed in the form of lengthening the training period. This strategy may be justi- fied in the promotion of an elitist system of education, but when the an- nounced objective of the reform is an expansion of the base of practical education for the mass of the population, such a strategy is expensive and inefficient in the use of the facilities and training staff of the teacher training colleges. Moreover, quality does not increase pari passu with an increase in years of training. Four-year (or even two-year) post-secondary graduates are likely to be over-trained and mis-trained for the kind of practical, community-oriented curriculum appropriate for the basic education cycle, particularly in rural Afghanistan. On the secondary level, the major worry is also the inappropriateness of the training curriculum and the lack of emphasis on occupational, vocational and practical arts on one side, and modern methodologies on the other. - 191 - 8.64 The target figures for teacher supply (Vol. II, Table 12.9) assume that the unqualified teachers presently employed will not be replaced. Even then, these targets cannot be met if the duration of training is expanded as proposed, as a number of new teacher training colleges will have to be built and equipped during the period of the Plan. Most likely they will not begin to produce graduates before the fourth year of the Plan or even later because of the time needed to construct them and provide them with teachers through the expanded program of the Academy for Teacher Educators. 8.65 Development of higher education is singled out in the Plan as "the pivot for the educational endeavours of the Republican Regime." However the objectives of such development are expressed in vague qualitative terms such as "compatibility with scientific realities and national requirement." These need to be spelled out operationally. The projected quantitative expansion (Volume II, Table 12.11 and summary Table 38) is so modest that the present actual intake and enrollment figures at Kabul University (Vol. II, Table 12.4) exceed the target figures for the last year of the Plan. There is a danger that such a rapid growth which is not synchronized with expansion of physical facilities and teaching force, will hurt the quality of instruction. The policy for higher education also lacks a definition of the role of the University in the overall development of the country, and the relationship between the University and the development and research agencies like those of the Ministries of Agriculture, Health, and Mines and Industries. 8.66 The narrowness of the formal system of education gives non-formal education a significant role in the social and economic development of Afghan- istan. About one-third of the population is under the age of 10 and about 55 percent under the age of 20. This majority of the population who will be the productive core of the country in the next few decades will not have enough opportunity in the formal system, as a high proportion will either not enter school or will drop out after a few grades. Even with the targeted growth of primary education there will be, according to the Plan, more than 1,800,000 children age 7-14 out of school in the year 1982/83. When the figures are corrected for over-age and repetition the number exceeds two million. 8.67 The Plan for non-formal education is very modest compared to the need. The target of educating 384,000 adults during the seven-year period of the Plan, is insignificant when we note that the "pool of illiterates" is annually increased by the number of children of age 7 who do not enter school (in addition to drop-outs in the early grades). During the same period the total number of such children is 1,200,000 (Vol. II, Table 12.6) more than three times the number of persons made literate. In addition the planned program has little impact on the female population which is already under- represented in the formal system. 8.68 To cope with the great demand for non-formal education, it is firstly important that, as nonformal education is expanding, the base of formal education grows much faster than population growth, so as tb reduce the input into the illiteracy pool. This will require clear targets for universal primary education within a reasonable time schedule. Secondly, non-formal education should be a concern of all Ministries and development 192 - agencies, and linked functionally with the Rural Development Program and the regional development projects of the Plan. Thirdly, the legislation and regulations regarding implementation of the programs must be flexible and nontraditional to allow the hiring of skilled instructors who do not neces- sarily have formal academic qualifications. The long-term solution to this problem is in the revision of the primary teacher training program to prepare primary teachers, not as academicians, but rather as community development promoters who will have the skills to teach in-school children and out-of- school youth and adults community-oriented skills. The vastness of the clientele for non-formal education justifies a comprehensive plan at least as detailed and ambitious as the one for formal education and a series of studies dealing with the use of different modes of delivery including the mass media. E. Education and Development 8.69 In order for education to fulfill its role in the social and econo- mic development of Afghanistan, certain modifications in the strategy for educational development are needed. There has been clear evidence since the formulation of the Plan, that the necessary re-thinking of priorities within the education sector is taking place, and a broad agreement is emerging on objectives which has already resulted in some useful actions being taken. The task ahead is to build on these initial steps. The thrust of the foregoing analysis, is to develop an educational system that is more community- and development-oriented than institution-oriented. The first aspect is to restrain vertical expansion and promote a faster growth of basic education by improving the distribution of education opportunities and increasing enroll- ment capacity. The implementation of horizontal expansion can be expedited on an equitable basis among regions by (a) carrying out a master activity of school mapping to establish a "carte scolaire" for optimal localization of primary schools on the basis of geographic distribution and population densi- ty; (b) improving the quality of the existing village schools in terms of facilities, curriculum, and teachers, and establishing similar new multigraded primary schools in areas where population does not justify a regular graded school; and (c) considering the possibility of a nuclear system of schooling based on a (4 + 4) - 4 structure whereby a number of four-grade schools feed into a smaller number of complementary schools that have Grades 5 and 6 or Grades 5 - 8, which in turn feed into a smaller number of secondary schools. On the non-formal level the scattered education and training activities need to be expanded within an overall plan to cope with the growing size of the out-of-school population and provide lateral coordination among the different agencies involved to produce a cumulative impact. 8.70 Since a major constraint to expansion of educational opportunities is the low efficiency in the present performance of the system (paras. 8.41 and 8.42), some measures need to be explored to improve this efficiency. While an overall improvement in the quality of the system positively affects effi- ciency and a shortening of the basic cycle decreases dropout rates, more direct measures are also proposed. Among these are (a) a modification in the policy of student flow to reintroduce some kind of automatic promotion in the early grades, (b) a revision of the examination system to make it more diagnostic in - 193 - nature, (c) an acceptance of the present student/teacher ratios, and (d) a higher utilization of the physical facilities by rotational scheduling and double shift. 8.71 Relating education to economic productivity is constrained by the inadequacy and unreliability of quantitative data on manpower and employment. What is needed is an employment policy study that analyzes (a) the development policies and their implications on employment and (b) the manpower implica- tions of the various employment policy alternatives. Such a study will assist in the formulation of an appropriate education and manpower development policy and implementation schemes. From what is available, however, it is clear that while the major share of training is geared towards the modern sectors, the traditional sectors of agriculture, livestock and handicrafts produce over 60 percent of the national product and employ nearly 70 percent of the labor force. Training, both within the context of basic education and as a separate activity, should therefore include economic and technological skills that are helpful in improving the productivity of those employed in these traditional sectors. This does not mean that skill requirements in rural areas are only agricultural - there is also a role for related skills such as mechanical repairs, woodwork, masonry, welding, and simple bookkeeping. In other words, a balanced training policy is needed to enhance traditional village and middle-level technologies while contributing to the development of the modern sector. Formal vocational institutions cannot cope with the vast need for such skill training and must therefore be supplemented by other modes of training such as mobile training units, extension programs, and project- related training. In addition, the concept of non-formal education must expand beyond functional literacy which attracts only a limited sector of the out-of-school population (para. 8.68). Rural development centers, where available, can be used as a base for coordination and operation. 8.72 On the more specialized level there may be difficulty in meeting specific manpower needs. The implementation of the development projects of the Plan requires about 14,500 high level personnel (Table 39) while the University would graduate no more than 12,500 within the same period according to the Plan proposal (para. 8.65). - 194 - Table 39: MANPOWER REQUIREMENTS OF THE PLAN Field High Level Medium Level Chemistry 101 140 Geology and Mineralogy 349 437 Mechanics 716 1,167 Power and Water 613 956 Technicians 89 235 Mines 176 193 Agriculture 1,259 2,972 Construction 613 497 Cartography 56 324 Economics and Administration 3,156 897 Medical Staff 1,830 1,525 Teachers 5,407 30,391 Other Occupations 117 8,723 TOTAL 14,482 48,457 Source: Plan P. 56. The shortage would be mainly in the productive fields of both industry and agriculture. In the industrial sector the high demand for engineers has already prompted the University to increase the intake into the Faculty of Engineering to cope with this need (para. 8.35) but without taking the neces- sary steps to preserve the quality of training by providing additional staff and facilities. Such a measure, while solving the quantitative manpower problem, creates a more serious problem for the productive sector by providing low-quality training. In agriculture, the supply of professional veterinarians and animal husbandry specialists will be very inadequate. At the subprofes- sional level, although the Plan asserts that the demand for the 8,703 medium- level personnel in the productive sectors will be met by the output from the vocational schools, it is most unlikely that such demand will be met by the conventional institutions of training (para. 8.61). The situation requires a diversified approach to training which includes (a) vocational schools to prepare manpower with a wide range of skills derived from related industries, (b) smaller vocational schools attached directly to enterprises, which can respond in a flexible way to their needs, and (c) project-related training ranging from special courses to on-the-job training. The curriculum for all these programs must be skill-oriented in formulation and implementation and based on a careful task analysis of the competencies needed for the different job specializations. 8.73 Qualitatively, the basic education curriculum needs to be community oriented for social and economic development in rural Afghanistan. While the young people in rural areas are most open to change, the primary school has, unfortunately, had little effect on rural development, because of the limited relevance of its program. The core of the curriculum should, therefore, be the - 195 - range of skills needed by the rural population, namely, (a) income-producing skills in agriculture and/or livestock; (b) auxiliary skills of home manage- ment, health and conservation of environment; and (c) skills for self-reliance and self-management that cover literacy, numeracy, cooperative management, and community organization. While a curriculum oriented towards preparation for further education discriminates against those that do not go into further education and alienates them, a community-oriented curriculum does not hurt those that proceed beyond basic education. 8.74 The strategies described above necessitate a revision of teacher training programs. The preparation of primary school teachers for rural education and community development implies significant changes in the curri- culum, facilities and teaching methods in the DMA's. The program for training secondary teachers needs to be practically and pedagogically oriented. Pro- grams for the preparation of teachers of vocational and technical courses need to be institutionally developed at Kabul University, and the legislation modified to allow the employment of specialized skill instructors who may not have the necessary academic qualifications. On the administrative level the coordinating body between the Ministry of Education and the Ministry of Higher Education needs to be formalized and to meet more frequently in order to coordinate the teacher training policy and supervise its implementation in the institutions belonging to the two Ministries. The Academy (para. 8.29) needs to be developed into an effective agency for educational innovation either as a part of Kabul University or as an institute for educational research and development. 8.75 The implementation of the educational strategies for development of Afghanistan requires an efficient and effective educational management in three areas. Firstly, on the central level, the problem of synchronization and coordination among the various units of the Ministry of Education dealing with the different processes of curriculum development can be resolved by a consolidation scheme. One approach is to consolidate all the development functions in the form of a research and development agency with some. autonomy and administrative flexibility to attract outstanding education specialists. Parallel to this an administrative structure for implementation, management and supervision should be organized on the basis of functional analysis. The planning unit, in this case, becomes a staff office attached to the Minister's office and serves as a secretariat to a planning board that reflects community participation. Secondly, it is very important under any scheme of reorga- nization to strengthen the provincial offices of education by raising the qualifications and rank of the education officer and equipping the offices with a cadre of professional staff that is capable of carrying out supervision and development functions effectively. Thirdly, the functional relationship between the Ministries of Education and Higher Education needs to be spelled out operationally. Since there are various approaches to this question of organization and management a study is suggested to examine the different alternatives and draw up an educational management plan. 8.76 The importance of the role of human capital in the economic develop- ment of Afghanistan is not reflected in the proportion of the Plan budget allocated to education. While in the previous Plans about 4 percent of the - 196 - development budget was earmarked for education, in the present Plan only 1.7 percent is devoted to the development of education. In respect to the ordinary budget, an average of 16.5 percent during the period of the Plan is maintained for education which does not indicate any recognition of its priority status. The functions that the education and training systems are expected to perform within the national development plan, aside from the problems created by past restrictive policy, require a significant upward revision of both budgets. - 197 - IX. THE PUBLIC HEALTH SITUATION 9.01 Health care is one of the greatest concerns of the people of Afghanistan. In areas where new roads are ending isolation, often the greatest benefit that is perceived is not access to markets and means of increasing in- come, but the possibility of using health services. The scope of the national health problem is staggering - currently at most one-fourth of the population is within reasonable reach of modern health care - yet health services are one of the lowest priorities of the Plan. And the health program as it stands does not relate adequately to either the health environment of the country or the Ministry of Public Health's declared priorities. 9.02 By international standards the public health effort of Afghanistan is weak. In 1976/77 total health-related public expenditure was about Af 57 ($1.20) per capita, and comprised about 0.65 percent of estimated GNP. 1/ Approximately 2.5 percent of the total budget allocation (development and ordinary) was allocated to health. By all three criteria, Afghanistan cur- rently ranks among the bottom fourth of developing countries. Nor are the prospects for improvement good; over the Plan period, only 1.9 percent of projected expenditures are for health. 2/ 9.03 Modern health services are new to Afghanistan. They are being in- troduced into a society in which traditional approaches to health care, which have evolved over centuries, are still deeply ingrained in the culture. The ultimate effectiveness of the modern public health system is largely dependent upon the extent to which it can become part of the peoples' overall approach to health care and the effectiveness of the health program itself. These two factors will determine the degree to which people will forsake their tradi- tional misconceptions and avail themselves of modern health services. This in turn will help determine the pace at which the public health program can make inroads into the enormous health problems of the country. A. Health Perceptions 9.04 In a country that has been as isolated for as long as Afghanistan, it is not surprising that health is surrounded by scores of traditional 1/ Includes ordinary (recurrent) and development budgets, and foreign assis- tance. About Af 36 per capita ordinary budget; Af 21 development budget. Urban water supply projects not included. Even if they were included, per capita expenditure would still only be Af 70, health expenditures 0.8 percent of estimated GNP and 3.2 percent of total budget allocations in 1975/76. Source: GNP - see Volume II Table 2.1, First Seven-Year Plan, Ministry of Public Health, and 1356 Ordinary and Development Budgets of Afghanistan. 2/ 1.2 percent of development budgets, 3.2 percent of ordinary budgets. Source: First Seven-Year Plan. - 198 - beliefs. The health care system begins at home. When someone falls ill, the first cures followed are usually traditional ones -- bed rest, herbal medicines prepared by the women and diet change. The traditional Greek system of "hot" and "cold" foods is adhered to. Depending upon the illness and body tempera- tures, foods of one type or the other are prescribed. In some cases, diet change constitutes withholding foods altogether as is often done in the case of diarrhea/dysentery. And then there are special treatments; for example, cures for hepatitis call for stringing onions around one's neck or swallowing a written verse from the Koran. Metaphysical beliefs play an important role in explaining and curing illness. In the case of repeated infant mortality, or otherwise inexplicable death, jinns and evil spirits are believed to be the cause. Almost every child gets an amulet at birth prepared by the mullah to ward off evil spirits. Other protection is seen in drinking water in which a written verse of the Koran has been immersed. Similarly, prayers and vows are among the first actions taken at onset of illness e.g., "If my son's health improves, I promise to visit the shrine every Friday for a year." 9.05 If household cures prove unsuccessful, the next level to which the family turns is usually the village. Persons contacted at this level include dais (midwives), bloodletters (usually the village barber), and the mullah. The mullah performs multiple functions, from allaying peoples' fears of evil spirits, to praying for the ill, and if he is a progressive man, to referring the patient to proper health authorities. Also located in some villages are small stores that stock a few basic medicines. 9.06 In the nearest bazaar, the next level of treatment is found. It usually comprises traditional medical practitioners, herbalists, bonesetters, holy people claiming descent from the prophet, and in some cases, shrines known for their ability to cure particular illnesses. Also located in some bazaars are pharmacies and Basic Health Centers (BHCs). In theory, BHCs have a medical staff of 7, and carry basic medicines that, if available, are dis- pensed free. They are also intended to provide immunization services, maternal and child health services, and sanitation education. The BHC is the outpost of the modern health delivery system. From there the path leads to the pro- vincial centers, with doctors, hospitals and pharmacies, further to regional centers, and finally to Kabul, with increasing degrees of specialization and sophistication. Operating vertically throughout the entire system are the mass eradication programs for smallpox and malaria. 9.07 The modern health system is thus merely one element in a vast array of health services, and in most areas is only the last resort. But in regions where modern medicine has made inroads, such a dichotomy does not appear to exist, all cures are part of the one health care system. If traditional cures fail, the modern are sought, and vice versa. Nor have city dwellers discarded the traditional sources; even in Kabul doctors prescribe traditional herbal medicines to supplement drugs. Rather the whole approach to health care appears eminently rational, the effective cures are retained and the others discarded, be they of modern or traditional origin. - 199 - 9.08 Where modern health services are available, peoples' perceptions of illness and cure have naturally changed. Jinns and evil spirits are being replaced by "microbes" as causes of illness; if anything, the pendulum has swung too far. In some cases traditional cures that sometimes helped and were rarely harmful have been discarded and patients will do anything to get modern medicines often regardless of how inappropriate they may be. Nor are they usually content with a single medicine; often prescriptions are written for several medicines that perform basically the same function, and there is almost religious faith in injections. 9.09 In a study of three provinces in 1976/77, an average annual expendi- ture on health of Af 2,878 per household (Af 402 per capita) was reported, with a median expenditure of Af 1,000. 1/ In another study, of 254 farmers in Parwan province, average expenditure on health was reported to be Af 918 per household (Af 151 per capita). 2/ This is three times the average public health expenditure per capita of Af 50. The significantly higher expenditure per capita in the first study can at least partly be explained by Baghlan and Helmand being perhaps the two most prosperous provinces in the country. In the Parwan survey about 4.6 percent of household income was allocated to health (compared to 8.6 percent in the U.S.). Respondents in Parwan allo- cated their health expenditures as follows: Table 40: ALLOCATION OF HEALTH EXPENDITURES IN PARWAN PROVINCE - 1975 Treatment Percent Pharmacy 32.3 Shrine 11.9 Kabul - Doctor and Hospital 19.7 Provincial - Doctor and Hospital 10.3 Mullah 8.6 Basic Health Center 2.1 Traditional Practitioners 5.3 Village store 5.2 Other 4.6 Total 100.0 Although the accuracy of these surveys must be open to considerable doubt, they nevertheless give a broad indication as to how villagers allocate their health expenditures; about 40 percent of expenditures are on medicines, 30 percent for doctors' fees and hospital-related expenses, and about 30 percent on traditional cures. 1/ Management Services for Health (MSH), The Village Health Worker: The Need and Potential as Determined by Survey in Three Provinces of Afghanistan, Kabul, 1977. 2/ Management Services for Health (MSH), Preliminary Report: A Village-Level Health Survey in Afghanistan, Kabul, 1975. - 200 - 9.10 Attitudes to modern medicine are characterized by open-mindedness and a desire for better cures. Unfortunately the notion of preventing illness before it occurs is still a foreign one. The majority of the population are oblivious to the true causes of disease - polluted water, improper sanitation practices, and malnutrition, are as little recognized as the causes of illness as they ever were. In short, there is no concept of preventive medicine. However, one cannot only fault the villagers, the same short-sightedness pervades the entire medical community, and but for a few small though notable programs, guides the nation's health strategy. 9.11 Polluted water is perhaps the single most important cause of disease in Afghanistan 1/. Afghans like good, clean water, but the overriding consid- eration when alternative sources are available is convenience. Unfortunately the most polluted water source, the jui or canal, is usually the most conve- nient. The 3-province survey mentioned above found the following pattern of water sources: 22.9 percent of households used a well in the yard, 1.6 percent a well in the village, 5.9 percent a river, 37.8 percent a jui, 12.8 percent a spring and 19.1 percent a karez. When asked if they were satisfied with their water supply, 78 percent said they were. This is one reason why up to 50 percent of the drinking water wells installed by the Ministry of Public Health have fallen into disrepair and people have simply reverted to their original source. There is evidence in individual cases that villagers realize the benefits of safe water and that they can be persuaded to maintain drinking water systems by communal efforts. This base must be built on through in- creased public awareness of the importance of unpolluted water. Until this is done, not only are the drinking water programs ineffective, but the public health program is dissipating scarce money, medicine, and manpower on treating preventable diseases. 9.12 Adults in general are aware of the importance of environmental sanitation and tend to keep away from juis and wells; however, children and animals display no such restraint. In addition, the jui serves as both washstand and laundry. Private latrines are often situated near other persons' wells and vice versa. In the above survey, 3.7 percent of the houses had their latrines in their own house, 39.2 percent within the yard, 3.7 percent used a deep hole in the yard, 15.3 percent a deep hole outside the yard, and 27.5 percent had no facilities at all. Not that such families or villages are necessarily worse off; on the contrary, some villages where private latrines were installed in the past show higher parasite incidence than similar vil- lages without such latrines. The chief blessing of a latrine is often not perceived in terms of health, but rather as a convenient collection point for night soil which is subsequently spread on the fields. The parasite cycle is then completed as man consumes the food. Once again, latrine programs, like drinking water programs, are only part of the solution; the public must be made fully aware of the underlying reasons why continuous preventive health measures are needed. 1/ See paras. 3.21 to 3.24. - 201 - 9.13 The public is also unaware of the importance of nutrition, and fails to identify it as a principal determinant of susceptibility to ill- ness. 1/ Again mass education is required, particularly of women, in making them aware of children's special needs. Other aspects of malnutrition are more intractable and will only come with increased incomes of the needy, and an improved transportation system. B. The Public Health Program 9.14 The National Health Plan for 1976/77 to 1982/83, drawn up by the Ministry of Public Health (MOPH), calls for development expenditure of Af 2 billion in the framework of the Seven-Year Plan. Simultaneously, current expenditure is to increase from Af 330 million in 1976/77 to Af 511 million by 1982/83. All aspects of public health services are to be expanded as shown in Table 41 below. Table 41: KEY HEALTH PROGRAM INDICATORS 1976/77 - 1982/83 1976/77 1982/83 Facilities: Hospitals /a 58 64 Beds /a 2,082 3,776 Pop.f/Bed 5,200 4,100 Basic Health Centers 107 193 Personnel: Doctors - 1,083 2,010 Pop./Doctor 12,900 7,800 Nurses 1,201 2,607 Pop./Nurse 11,700 6,000 Programs: Malaria control 7.40 m. 8.50 m. (Coverage of persons) Rural Water Supply 1.20 m. 4.50 m. Immunization /b 200,000 650,000 of which: TB/Leprosy 36,000 50,000 Basic Health Services /c 1.89 m. 3.86 m. Hospitals /d 80,375 113,160 /a Excludes military hospitals. /b Diptheria, Polio, and Tetanus (DPT); BCG, smallpox. /c See Table 50 for assumptions. /d Average length of stay and bed occupancy rate assumed constant over period. Sources: 1) The First Seven-Year Plan, Ministry of Planning, Kabul, 1976. 2) Management Services for Health (MSH), Financial Analysis of Health Programs, Kabul, 1977. 3) Ministry of Public Health. 1/ See paras. 3.15 to 3.20 for a detailed review of nutritional problems. - 202 - 9.15 While this is not in itself an overly ambitious program, MOPH is nevertheless finding itself hard-put to fulfill it. By its second year the National Health Plan had already undergone substantial revision, and 1977/78 ordinary budget allocations were cut by 13 percent because the Ministry of Finance felt MOPH was unable to absorb its requested budget. 1/ More dis- turbing than the size of the cut though is the way in which the cuts were distributed. As the following table indicates, some critical trade-offs have been made. Table 42: 1977/78 PLANNED HEALTH EXPENDITURE BY MAJOR PROGRAM (Af Million) Original Revised Own Project Own Project Resources Assistance Resources Assistance 1) Immunization 7.4 2.3 3.0 2.3 2) TB/Leprosy 6.0 30.7 3.9 30.7 3) Malaria 69.5 49.9 64.0 49.9 4) Rural Water Supply /a 13.1 37.0 13.1 8.8 5) Basic Health Services 76.0 40.7 58.0 40.7 6) Hospitals 173.6 49.7 191.5 49.7 7) Administration, Training, etc. 89.6 4.1 55.0 4.1 445.2 214.4 388.5 186.2 /a Af 3.6 million - ordinary budget; remainder development budget. Source: MOPH. Note - In the revised plan, Af 315 milion (excluding project assistance) comes through the MOPH ordinary budget, covering programs (1), (2), (5), (6), and (7). 1/ The Ministry of Public Health's ordinary budget contains only about half of total recurrent expenditures in the health field, and is consequently misleading. For instance, the malaria program, which comprises about one fourth of total recurrent expenditure, is a vertically-organized program operating independently and parallel to regular MOPH activities. It draws its funds directly from the Ministry of Finance. Furthermore, MOPH and the malaria program both receive large amounts of foreign assistance for recurrent costs that never appear to enter the budget. Such practices inevitably distort the true health resource allocation picture, and hinder comprehensive programming and budgeting. The ordinary budget should, like the development budget, explicitly include foreign assistance. This would enable the budget of the MOPH to be seen as a whole instead of the confusing sum of independent parts it is now. - 203 - 9.16 In essence, urban health services have been increased, and rural services reduced, for although overall expenditure on health programs have been cut by 13 percent, planned hospital expenditures have been increased by 8 percent, while expenditure on malaria control, immunization, rural water supplies and Basic Health Services, all programs that are essentially rural in impact, have suffered a combined reduction of 19 percent. Only in the case of the rural water supply programs was an expected shortfall in project assistance the cause. Thus reallocation of funds only serves to reinforce the disproportionate emphasis on urban-oriented health services that the plan already embodies - over 49 percent of planned 1977/78 expenditures are now for urban hospitals and outpatient services. 9.17 The rural programs may well have been overly ambitious, and are by nature the more difficult to deliver, yet they are the more urgent priorities. The original budget request for an increase of about 25 percent over 1976/77 was not unreasonable. The programs that were cut were the very programs slated to increase the most over the Plan period as percentages of total health expendi- tures - immunization from 1.5 percent to 3.2 percent and rural water supply from 7.6 percent to 25.0 percent. (Malaria eradication on the other hand, is to drop from 18.2 percent to 15.1 percent and hospitals from 48.5 percent to 38.9 percent.) It is highly questionable whether the targets of the 1980's can be met if the current trend persists - programs designed to achieve them are cut and those programs envisioned to be reduced are expanded. For instance, the rural water supply program was originally intended to reach 300,000 people in 1977/78. That has since been reduced to 225,000 and, with the shortfall in project assistance, it is doubtful it if will even reach 100,000 which is less than half the natural increase in the rural population. As difficult as rural programs are to implement, rural Afghanistan constitutes by far the largest part of the national health problem, and it is on MOPH's success in improving rural health that the effectiveness of the public health program will ulti- mately be judged. 9.18 Not only does the 1977/78 budget reveal a disturbing imbalance between rural- and urban-oriented expenditure, the expenditures themselves bear little relation to MOPH's declared priority among different groups within the urban and rural population. In the National Health Plan, priority in health programming was to be assessed on the basis of mortality and the inci- dence of illness. Consequently, infants were declared the highest priority group followed by children, mothers and the work force. Yet in practice, budget allocations by program result in a pattern of use of services which is out of line with the stated order of importance. This is shown in Table 43 below. - 204 - Table 43: EXPECTED UTILIZATION OF HEALTH SERVICES - 1977/78 BUDGET (Af Million) Infants Children Labor 0-1 1-14 Mothers Force Budget % Immunization 2.1 2.1 1.1 - 5.3 1.0 TB/Leprosy - 9.0 3.5 22.1 34.6 6.7 Malaria 4.6 53.6 8.0 47.7 113.9 22.1 Water Supply 0.9 10.3 1.5 9.2 21.9 4.2 Basic Health Services 6.9 36.6 5.9 49.3 98.7 19.1 Hospitals 16.9 50.7 24.1 149.5 241.2 46.9 TOTAL 31.4 162.3 44.1 277.8 515.6 100.0 as percent of total budget 6.1% 31.5% 8.5% 53.9% 100% Source: MSH, Financial Analysis of Health Programs, Kabul, 1977, Table 1. Only 6 percent of total health expenditure is directed at infants who suffer almost 40 percent of total mortality. Similarly, mothers who suffer high maternal mortality and the physical exhaustion of consecutive births receive only 8.5 percent of the expenditure. On the other hand, those exposed to the fewest health hazards - adult males - are the focus of nearly 54 percent of the health effort. As essential as a healthy labor force is to economic development, it is hardly of the same overriding significance to the quality of life in Afghanistan as the high mortality of infants, children and mothers. This is not to argue that the level of expenditure on hospitals is inappro- priate. Obviously one of the important objectives must be to get women to make more use of hospital facilities for themselves and their children. This relates in large part to the low educational levels of the female population and the lack of trained female medical personnel. 9.19 The heavy emphasis on urban health services for the work force is symptomatic of the fundamental bias of the health system towards curative health services. The breakdown of planned expenditure in Table 42 indicates Af 141 million of Af 514.6 million (excludes MOPH overhead) or about 27.4 percent of planned health expenditures can be classified as preventive; the remaining Af 373.6 million (72.6 percent) is for curative purposes. 1/ This heavy emphasis on curative health is typical of most developing countries where modern health services get equated with big modern hospitals equipped 1/ MOPH classifies Basic Health Services as preventive health services; in actual fact very little currently associated with them is preventive. However, as explained in para. 9.15 footnote 1/ the budget data has numerous deficiencies which would affect the classification of other items as between curative and preventive. - 205 - with sophisticated equipment and manned by highly trained medical personnel. The connection between preventive and curative medicine is only dimly perceived. It seems to go unnoticed that a BCG vaccination costing as little as Af 20 can prevent patients from ultimately having to seek multiple TB treatments at a sanatorium at an average cost of Af 1,050 per treatment 1/, or that clean water delivered for as little as Af 31 per person can keep someone out of a hospital visit that costs an average of Af 1,930 for children or Af 4,000 for adults. The financial case for increased preventive measures is overwhelming without even considering the suffering and hardship which treatment exact from patient and family alike, or the fact that upon release from hospital the patient returns to the very environment from which he or she more than likely became ill in the first place. Clearly, given the overall low level of health expenditures, we would argue that the increase in preventive health measures should be additional to, and not at the expense of the current effort on the curative side. It is important however, that when cuts must be made for one reason or another, the axe should not fall on key preventive health programs, as has been the case in the past. C. The Health Delivery System 9.20 A health program can only be as effective as the system that delivers it. The principal components of the current system in Afghanistan are: hospitals, basic health centers, mother and child health care programs, the mass immunization program and the malaria control program. A Village Health Worker Scheme is in the pilot program stage. Of importance to all programs is the availability of drugs and manpower. (i) Hospitals 9.21 Hospitals provide both in-patient and outpatient services. In- patient services account for about 95 percent of total MOPH hospital expendi- ture, and in 1975/76 about 70,000 patients were treated in this way. In addition, over f50,000 patients were treated through outpatient services, on less than 5 percent of the budget. Outpatient services are extremely cost- effective and while they are not unrelated to the number of inpatients, there is some scope for expanding them relatively more rapidly than other services. 2/ The Ministry.of Public Health (MOPH) is attempting to establish a medical referral system that begins at the Basic Health Centers and leads through the provincial and regional hospitals to the large and specialized hospitals of Kabul. Patients would be referred upwards through the hierarchy to the lowest level able to treat them. To bring hospital services closer to 1/ In Afghanistan, one TB treatment is rarely sufficient to cure. Unit treatment costs from MSH, Financial Analysis of Health Programs, Kabul, 1977. 2/ Average outpatient costs assumed equal to those of a Basic Health Center visit. More than half of assumed in-patients not documented (see para. 9.22). - 206 - the people, a network of hospitals has been established ranging from hospitals of over 100 beds in Kabul down to small 10-bed hospitals in provincial centers. The current distribution of hospitals by size (as well as the targets of the Seven-Year Plan) is given in the following table. /a Table 44: HOSPITAL BEDS BY SIZE OF HOSPITAL- 1976/77 - 1982/83 1976/77 1982/83 Size (beds) No. Total Beds No. Total Beds 101 and above 6 1340 10 2255 51 - 100 9 647 5 412 26 - 50 8 269 16 579 11 - 25 11 190 21 400 10 24 240 13 130 All Hospitals 58 2686 65 3776 /a Excluding Ministry of Defense institutions. Source: Ministry of Public Health. 9.22 In evaluating the system of hospital in-patient care per se, two important issues stand out: the equity and efficiency of the system. Both the distribution and utilization of hospital in-patient services in Afghanistan are inequitable. Approximately 61 percent of all hospital beds open to the public, are located in Kabul, and the remainder are all located in urban provincial centers. 1/ Primarily for this reason, the majority of hospital patients are also urban - in 1975/76, 48 percent of all in-patients in Kabul hospitals came from Kabul itself, and 78 percent of those of provincial hos- pitals came from the same town. 2/ The distribution of those who utilized hospital in-patient services was also heavily biased, as is shown in Table 45 below. l/ See Vol. II, Table 13.1. 2/ Source: In-patients in Afghanistan Hospitals - 1354 Report, Ministry of Public Health, Kabul, 1976. - 207 - Table 45: HOSPITAL IN-PATIENTS BY AGE AND SEX - 1975/76 (Percent) Kabul Hospitals Provincial Hospitals Age Male Female Male Female 0- 4 2 1 2 1 5-14 5 3 6 2 15-44 42 17 53 15 45+ 24 6 18 3 Sex of Total 73 27 79 21 Total 100 100 Source: As for Table 41. Males comprise 73 percent of all in-patients in Kabul (79 percent in the provinces), while children below age 15 comprise only 11 percent of all in- patients, in both cases. Once again this pattern is the exact reverse of the priorities laid down by MOPH. Adult urban males, the least susceptible group to illness, receive over 65 percent of MOPH hospital services, while children under 5 who comprise half of total mortality receive only 3 percent. 1/ Hospital services are free; however, in practice a hospital stay can become quite expensive. Transport to Kabul, medicines available in the bazaar but not in the hospital, and blood (if necessary), are major expenses. Private rooms and private consulting are optional extras. 9.23 Hospital services operate inefficiently for a variety of reasons. The principal reason lies in the inability of the many small hospitals to cure patients, most of whose illnesses are well advanced and for whom hospital care has become the last resort. Consequently, many patients die, and many more become wary of entering. In fact, as the following table indicates, once the decision is made to enter a hospital, many patients appear to want only the best and proceed directly to Kabul, effectively by-passing the referral system. 1/ In financial terms, the distribution is even more skewed as the average cost per adult in-patient is approximately Af 4,000, while the average cost per child in-patient is only Af 1,930. Source: MSH, Financial Analysis of Health Programs, Kabul, 1977, Table 2. - 208 - Table 46: MOPH HOSPITAL OCCUPANCY RATES BY HOSPITAL SIZE (1975/76) Size (beds) Bed Occupancy Rate (%) 101 and above 104 51 - 100 59 26 - 50 66 11 - 25 54 1- 10 32 All Hospitals 78 Kabul Hospitals 103 Provincial Hospitals 52 Note: Excludes Ministry of Education, Ministry of Defense, and restricted hospitals. Source: Ministry of Public Health. Kabul hospitals have over 100 percent occupancy (patients overflowing into hospital halls, and two-to-a-bed are not uncommon), whereas provincial hos- pitals have a rate of only 52 percent. This includes 240 beds in 10-bed hospitals - about 20 percent of provincial hospital beds - that have an occupancy rate of only 32 percent. 1/ This pattern of much higher occupancy rates at the largest hospitals in the capital, is typical of many developing countries and reflects an accurate assessment by patients and their families that treatment will be better in these hospitals. 9.24 The hospital program absorbs about 65 percent of the MOPH development budget, and about 40 percent of MOPH recurrent expenditures, yet the effective- ness of the program is open to serious doubt. Mortality among patients is high. Part of the problem undoubtedly stems from many patients entering hospitals only when it is too late, but part also probably relates to the quality of care. Even in Kabul, hospital hygiene is well below international standards, and in the provinces, conditions are still worse. In future, primary emphasis will have to be placed on increasing the efficiency and quality of hospital care. High quality hospital care is expensive, but as MOPH with its small provincial hospitals has discovered, quality hospital care cannot be compromised. MOPH must re-orient its development plans so as to emphasize quality at the expense of quantity to make as effective use as possible of limited finances and manpower resources. 9.25 It may seem curious on the surface to argue for better quality hospital care when clearly the emphasis of health services must be on broader 1/ The 10-bed hospitals are notoriously inadequate and provide little, apart from bedrest and round-the-clock care, that a properly equipped Basic Health Center cannot. - 209 - coverage. Streamlined, efficient hospital services are not inconsistent how- ever with a broader based referral system which permits treatment of minor complaints through Basic Health Centers. To achieve this, first, the small 10-bed hospitals should be given up. Not only are they inefficient, but worse still, they are ineffective. Emphasis should be put on the development of large regional hospitals where economies of scale allow effective treatment-. Fortunately, MOPH is taking a significant step in this direction. As part of the Plan, five new 250-bed hospitals will be constructed in large regional centers. 1/ In addition, no new 10-bed hospitals will be constructed, and many existing ones will be upgraded to 15 to 25-bed units (see Table 44). However, this measure does not go far enough, for even 25-bed hospitals can efficiently treat only a very limited number of illnesses. A better approach would entail giving them up entirely in those provinces where larger, better- equipped hospitals exist, and transferring the staff and equipment to larger hospitals where they could be more fully and effectively utilized or, better still, to Basic Health Centers. The MOPH is currently studying the possibility of converting 20 district hospital buildings into Basic Health Centers with a few rest beds. In provinces where no larger hospitals exist, all but one should be given up, which should be upgraded to the 25-bed level and reasonably well staffed and equipped. Such a strategy would result in somewhat fewer but better equipped and staffed hospitals capable of treating more varied illnesses than before. This would help build confidence in provincial hospitals, and so increase their utilization, the key to efficient, cost effective in-patient hospital services. 9.26 A second area in which hospitals could become more efficient is in the in-patient/out-patient mix. A large proportion of in-patient costs are hotel costs - meals, laundry, and other services - that have little relation to treatment. Many patients enter hospitals with diseases (many respiratory and digestive diseases, for instance) that could be treated just as effec- tively but at lower cost on an out-patient basis. 2/ Attempts should be made to identify such patients and treat them as outpatients instead. Similarly, attempts should be made to reduce the length of in-patient stay. Currently the average stay in general hospitals is 12.3 days; in Kabul, 16.6 days. This is far longer than the average stay in developed countries. Although many Afghan patients are more seriously ill than their developed country counter- parts, even relatively routine cases like appendicitis are followed by far longer post-operative in-patient care. Part of the answer is that the Govern- ment of Afghanistan should consider the imposition of an effective fee-for- service system. As the system expands and hospital visits increase, costs are 1/ This will also help improve the balance of hospital beds between Kabul and the rest of the country. By the end of the Plan, only 41 percent of hospital beds will be in Kabul. 2/ Out-patient services are also more equitably utilized: 16 percent are infants, 22 percent are children 1-4, 22 percent children 5-14, while 17 percent are adult females and only 23 percent adult males. Apparently adult males enter hospitals for many illnesses for which other groups are treated on an out-patient basis. - 210 - going to soar. Measures to increase efficiency will help, but not solve the problem, whereas charging fees would encourage patients to seek out-patient treatment, to keep hospital stays short, and ease pressure on the MOPH budget. All of which would allow the provision of better health care. A start has been made by levying charges for private rooms, laboratory tests and blood transfusions. Further moves in this direction are needed. In the absence of health insurance schemes, a fee assessed on ability to pay would be a workable and equitable solution. I/ (ii) Basic Health Services 9.27 The Basic Health Services program is the principal focus of the MOPH rural health effort. The program began with the establishment of 4 Basic Health Centers in Parwan province in 1968/9. By mid-1977 this number had grown to 114 in all 26 provinces, and by the end of the Plan, 193 are expected to be in place. In 1976/77 Basic Health Services received about 17 percent of MOPH ordinary budget allocations, and are to continue receiving this percentage throughout the Plan. About 23 percent of MOPH development expenditures during the Plan are allocated for the construction and equipping of BHC. The BHC is a multi-purpose health institution, providing both preventive and curative services. Each BHC has a professional staff of 7 comprising 1 doctor, 1 male nurse, 1 auxiliary nurse/midwife, 1 sanitarian, 1 lab-technician, and 2 vac- cinators. Patients whose illness can be cured with available medicines are treated on-location; more serious cases are referred to the nearest hospital. BHCs provide no in-patient services. Preventive services include sanitarians who are supposed to spend most of their time in the surrounding area impressing upon people the need for proper hygiene and clean water, vaccinators as part of the mass immunization program, and the provision of World Food Program (WFP) supplies to expectant and nursing mothers and young children. 9.28 The Basic Health Centers have not yet had the impact on rural health they were intended to. A large part of this stems from the dispersed nature of the population and the inadequacy of transportation facilities. Although some patients come from over 15 km away, a survey of five BHCs in Parwan prov- ince indicated that half the patients came from between 2 and 6 kilometers. 2/ For practical purposes, the BHCs had catchment areas of about 6 kilometers. As a consequence, BHC utilization has been limited - even assuming only one visit per patient, to approximately 495,000 visits per year, i.e., less than 6 percent of the total settled rural population visited a BHC in 1976/77. 3/ The average number of visits to each of the 114 BHCs daily is less than 12. This represents serious underutilization of the services. And if such utilization 1/ That such a system can function in Afghanistan is known; a large, well- run semi-private eye clinic in Kabul charges from zero to Af 500 per visit, depending on how they assess ability to pay. The fee deters no one, and all praise the quality of treatment. 2/ MSH, Parwan Basic Health Center Pilot Project - Evaluation Report, Kabul 1976. 3/ Estimate calculated from MOPH Report of Health Activities, first and second quarters, 1977 and IBRD population estimates. - 211 - patterns were to persist, the completed network of 193 BHCs would receive only about 838,000 visits annually by 1982/83, which (assuming only one visit per patient) would still comprise less than 7 percent of the rural population. 9.29 If BHCs are to have significant impact on the rural health scene, then utilization will have to increase greatly. The key to increasing their utilization is enabling them to provide the services they were intended but which, for lack of staff and materials, they are unable to provide at present. The lack of staff is a serious problem. While almost all BHCs have doctors, the supply of other staff is inadequate. Female staff are in extremely short supply -- in mid-1977 only 32 BHCs had auxiliary nurse/midwives. Yet female staff are essential if large numbers of women and children are to use the Center. Measures are being taken however, to alleviate the shortage (see para. 9.46). On the other hand, 54 BHCs have lab technicians. Questions have been raised as to the need for this activity at the BHC level. In terms of overall supply, lab technicians are expected to be in severe shortage. Under these circumstances it may be more appropriate at this stage to sta- tion lab technicians at the provincial hospital level where their services could be effectively utilized. 9.30 But perhaps the greatest problem is the supply and management of drugs. Currently all BHC medicines are divided up into 114 equal shares, irrespective of the relative utilization of particular BHCs. In consequence the more heavily utilized BHCs find their annual share of drugs insufficient for more than six months' operations; in some cases more than 70 percent of all patients must be referred to pharmacies. Of course, if pharmacies are convenient this presents little problem, but in most cases they are not. Under these circumstances, many of those who are ill do not bother visiting BHCs at all. Proposals have been made to rationalize the drug distribution system; they must be implemented. The first step involves reorganizing the warehouse, logistics and information system to ensure adequate supplies of drugs when and where they are needed. A second equally important aspect involves rationalizing the drug stocks themselves. Surveys conducted at BHCs have indicated that the 10 most common diagnoses accounted for 57 percent of all diagnoses and the 25 most common accounted for 85 percent. The standard drug issue contains 58 items, some of which are outdated and others little used. A revised list of 40 drugs has been found capable of treating 90-95 percent of all patients who visit BHCs. A full complement of staff and adequate drugs tripled BHC visits to over 26,000 per year in the Parwan pilot project. If the utilization can be increased in other BHCs to the same extent, the envisioned 193 BHC network could reach 3.9 million or about 29 percent of the rural population by 1982/83. With the program reaching this number of people, if MOPH wishes to keep drug costs down and still be able to provide adequate service to all patients, there will have to be at least a small charge for drugs, with funds earmarked for financing MOPH programs and not transferred to the general budget. 9.31 In addition to the BHCs, the MOPH proposes to increase rural cover- age through the establishment of health sub-centers. Eventually between one and three sub-centers would be attached to each BHC. Each sub-center would be staffed full-time by one nurse and one vaccinator, and would be visited once - 212 - a week on a predetermined day by the doctor of the BHC to which it is attached. This is a logical approach, and may in the long run be part of the solution. However, at present, this appears to be overextending the BHC system before it gets a chance to establish itself firmly. Although 73 such sub-centers existed on paper by mid-1977, very few were operational. Management problems including transportation and accommodations, not to mention shortages of drugs and manpower, currently plague the program. Given the numerous constraints under which the BHC program and MOPH in general operate, it makes better sense to delay the sub-centers and concentrate on consolidating the existing BHC pro- gram. This would be done by proper staffing, adequate supplies of drugs, and outreach activities such as increased participation in community affairs, vac- cination programs in local schools, and house visits by sanitarians and female staff to impress on the population the necessity of improved nutrition, hygiene and sanitation. But in these respects the BHCs must practice what they preach. Very few have either a source of unpolluted water or proper sanitation, and WFP food supplements are few and far between. 9.32 Surveys show that the public generally holds the BHCs in high esteem; when a BHC is nearby, one third of those questioned believed it was the best source of treatment for illness not curable at home. 1/ There were complaints however -- lack of medicines, petty corruption, and distance. One important and positive finding was that in only 7 percent of the cases were females not permitted by husbands and fathers to visit the BHC. The BHC concept is sound and what is needed is to increase their utilization. Not only would this make more efficient use of scarce trained medical manpower, but could also dramat- ically increase the effective coverage of the rural population. (iii) Village Health Worker 9.33 The MOPH realizes that the current network of hospitals and BHCs is inadequate for providing the majority of the nation's 10.5 million rural in- habitants scattered in some 20,000 villages with basic medical care. There- fore it has been decided to introduce a Village Health Worker (VHW) program modelled on the "barefoot doctor" schemes of other countries. Under the scheme, volunteers chosen by the villagers and screened for suitabiity by MOPH would undergo intensive training for eight weeks at a specially equipped BHC. They would be instructed in matters of fundamental hygiene and nutri- tion, and be taught to diagnose and treat simple illnesses. They would be attached to the nearest BHC, from which they would draw supplies and to which they would refer more serious cases. 9.34 The success of the VHW approach is largely contingent upon the degree to which the VHW scheme can be integrated into the parochialism of everyday Afghan village life and the village social structure. A sensible approach is being adopted to insure this by seeking to give the VHW status similar to that of the malik, mirab and mullah (see para. 1.09). To begin with, each village must make certain commitments: services and drugs must be paid for by the village (in a manner to be determined by the villagers themselves), and the 1/ Source: MSH, The Village Health Worker: The Need and Potential as Determined by Survey in Three Provinces in Afghanistan, Kabul, 1977. - 213 - village must demonstrate interest in the scheme. The VHWs should be literate, preferably of reasonable economic status, and be from the same village. Vil- lagers are traditionally wary of outsiders; by being from the same village the need to fight for acceptance is minimized and the ability to influence strength- ened. But perhaps the most important condition of all to ensuring the success of the program is providing the VHWs with a sufficient supply of drugs. Afghans have enormous confidence in drugs; failure to supply the VHWs adequately would seriously undermine their credibility and jeopardize the entire program. 9.35 The pilot stage of the program began in mid-1977 with the graduation of 40 VHWs in the eastern region. Contingent upon the success of the pilot pro- gram, up to 1500 VHWs will be trained by the end of the Plan. Details of the proposed program are as follows: Table 47: VHW PROGRAM - PROJECTED NUMBER OF BHC, VILLAGES AND VHW 1977/78-1982/83 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 No. of BHCs /a 3 10 20 32 46 60 No. of Villages 30 120 260 443 690 1000 No, of VHWs 45 180 390 665 1035 1500 /a Program does not include all BHCs - 196 by end of Plan. Source: MSH, A Proposed Village Health Worker Program for the People of Afghanistan, Kabul, 1977. (iv) Water Supply 9.36 Although contaminated water has been identified as a major cause of illness and disease in Afghanistan, a recent IBRD-WHO sector survey indicated that at most 5 percent of the population has potential access to public water supply systems 1/. The water supply program is weak by international standards - total development expenditure on water supply in the Plan is estimated at Af 3.1 billion, only about 1.3 percent of total outlays. 43 percent of these out- lays are for Kabul, 42 percent for rural water supply projects and 15 percent for other urban systems. Approximately 57 percent is to be financed through foreign assistance. 9.37 The responsibility for providing drinking water is split between the Central Authority for Water and Sewerage (CAWS), a quasi-independent authority in the Ministry of Public Works which is responsible for the provision of water and sewerage systems to the 87 designated urban areas, and the Environmental Health Department (EHD) of the Ministry for Public Health which is responsible for the provision of clean water to rural areas. In practice, however, the 1/ Water Supply and Sanitation Sector Study, World Health Organization/ World Bank Co-operative Program, First Draft, July 1977. - 214 - distinction has been less clear-cut - EHD has installed systems in nine minor urban areas. 9.38 EHD has a target of providing 25 percent of the rural population with potable water by the end of the Plan, a goal the sector survey believes it is unlikely to achieve. It currently serves at most 300,000 people, less than 3 percent of the rural population. (The actual number is probably far less, as up to half the installed systems are currently not operational.) On the basis of current implementing ability, the targets for the Plan appear un- attainable; the sector survey estimates that the program will probably only reach about 1.6 million people, less than half the original target. UNICEF has pledged its support to the program, and no constraint in the supply of materials and equipment to meet the target is evident. The primary constraint appears to be a lack of counterpart local resources. Rural water supply is not the priority item to Government of Afghanistan that it should be, consider- ing its importance to public health. Including foreign assistance, it was only budgeted at 3.8 percent of health expenditures in 1977/78; and the Ministry of Public Health itself receives one of the smallest allocations - only 2.5 per- cent of the budget. A major increase in effort and allocations is needed even to attain its declared goal of 25 percent rural coverage during the Plan, a goal that should indeed be far higher. 9.39 Urban water supply programs have to date concentrated on the five principal urban centers: Kabul, Kandahar, Herat, Jalalabad, and Mazar-i- Sharif. Although these systems are all functioning, coverage currently varies from 14 percent for Kandahar and 22 percent for Kabul, to over 90 percent for Jalalabad. All these systems are currently being expanded, and will consume a major portion of CAWS' allocation over the Plan. CAWS will also continue with the implementation of water supply schemes in four other towns. The Plan also calls for the provision of supplies to a further 10 towns, and the sector sur- vey believes these are currently beyond the implementing ability of CAWS. No provision at all is being made for the remaining 72 municipalities. Part of the reason for CAWS' slow implementation rate is undoubtedly resources, but it may also be in part a. consequence of the strategy of concentrating on supply through house connections (except for public standposts at mosques). To supply water to all inhabitants under such a strategy requires of course connections at all households. Not only is this more expensive than reducing the number of house connections and providing some public standposts as well, it is also more time-consuming. Considering the number of urban centers which would otherwise be without piped water supply during the Plan, CAWS should focus on delivering water to more towns but on a less intensive scale than currently planned. This would enable the limited manpower and physical resources at CAWS' disposal to be used in a more effective manner in terms of the number of urban inhabitants reached. Then, at a later stage, these systems could be expanded into providing a larger number of direct household connections. (v) Mother and Child Health Care (MCH) Services and Nutrition Programs 9.40 The current MCH program has two components. The first is a series of 37 urban clinics - 1 per province (except Zabul), and 13 in Kabul (9 full- time and 4 satellite clinics). These clinics provide expectant mothers with - 215 - vitamin and mineral supplements and World Food Program (WFP) food including powdered milk and wheat. They assist the mother at childbirth, immunize the child and continue to provide nutrition supplements for two years, all free of charge. Each clinic is supposed to have a medical staff of 10; however, few outside Kabul have the full complement. In particular, pediatricians and all female staff are in short supply. A second aspect of MCH activities is the distribution of WFP food and vitamin and mineral supplements in rural areas, through the Basic Health Centers and hospital outpatient clinics. This aspect of the program has been beset by problems. Not only are the distributed amounts inadequate but they are also sporadic, and individual BHCs can go as long as six months without re-supply. 1/ And when they arrive, they are exhausted within days. A major intended side effect of the program is to draw people to the BHCs and to make people aware of their other functions. Unfor- tunately, as explained earlier, food distribution is currently the only effec- tive service some BHCs are capable of providing. 9.41 The WFP program assistance is the only large-scale organized assis- tance program in the nutrition field. MCH assistance is channeled through 157 centers including BHCs, provincial hospitals/polyclinics, Kabul MCH clinics, and 21 kindergartens (primarily in Kabul). In December 1976 WFP coverage included 25,800 mothers and 39,000 children. Rations were as follows: Table 48: WFP SUPPLEMENTAL FOOD RATIONS (PER DAY) Skim Milk Vegetable Wheat Powder Oil Mothers (for 3 months preceding birth, and 12 months after) 200 gm. 60 gm. 40 gm. Children (2nd and 3rd year after birth) 100 gm. 40 gm. 20 gm. Source: WFP. The WFP program has recently been expanded to include coverage of hospital inpatients (2,100 beds), TB outpatients, and children in kindergartens. The kindergarten program, whereby children who already come exclusively from the privileged classes are given free meals, is a gross distortion of priorities. While TB outpatients and hospital inpatients are rightfully needy persons for whom nutrition is, in many cases, otherwise inadequate, for them to be aided under a program that was originally conceived for MCH purposes places the original purpose of the program in jeopardy. In the urban areas, where the possibilities of expanded coverage are easy, the program already covers almost 80 percent of hospital beds. WFP's interest in increasing assistance, 1/ Although mothers and children are supposed to be registered and examined at the BHC, in actual fact, very few are. The program then merely becomes a free-for-all, lowering the amounts available for the target groups. Distribution is, in theory, monthly. - 216 - combined with difficulties encountered in rural distribution, run the danger of converting the program from one of nutrition supplements for the neediest to subsidization of the privileged. The rural program must be re-emphasized and greater efforts make to provide effective coverage based upon proper registration to ensure rations reach the target groups. 9.42 Obviously the nutritional problem will not be solved by hand-outs at the BHCs alone. The primary emphasis must be on adequate incomes and proper nutritional practices in the home. What is needed is an intensive education program to teach good dietary practices, using mass media like radio, films and newspapers. Most of the ingredients for better nutrition, particularly milk, are already available. It is a matter of convincing mothers to feed them to children. Nutrition education is supposed to be part of the MCH program, but it has not yet been implemented. (vi) Other Programs 9.43 The malaria program accounts for over 20 percent of total recurrent health expenditure. The program is operated through the Malaria Institute, a semi-autonomous agency of the MOPH, and receives its funding directly from the Ministry of Finance. The program covers eradication and control through the spraying of breeding areas (including houses), the release of larvae-eating fish in rice fields, and the distribution of tablets. One potentially very effective means of containing malaria, the draining and drying of rice fields once a week, is rarely followed as water is scarce and farmers are reluctant to lose it. Although malaria was almost eradicated in the mid-1960s, it has since re-emerged and certain species have developed resistance to DDT. This has forced a switch in some areas to Malathone, a more expensive and malodorous insecticide. Eradication remains the long term goal of the program; however, the immediate goal is containing it at between 250,000 and 500,000 cases. To this end 30 teams comprising about 1,750 persons will be active in malarial regions. About half the program's costs are borne by WHO and UNDP. In future, however, the Government will have to bear more of the cost if the effort is not to slip as it did in the later 1960s. Even as the program stands, cover- age is only scheduled to expand from 7.4 million in 1975/76 to 8.5 million in 1983/84 - about proportional to the natural increase in population. 9.44 Mass immunization is one of the most cost-effective forms of preven- tive medicine available, particularly for children. For as little as Af 48 per child, many childhood diseases including tetanus, diphtheria, polio and measles can be prevented. In addition TB, which is the scourge of many areas of Afghanistan, could be reduced and eventually eliminated. The immunization program is to be carried out through BHCs, hospitals, and schools. 1/ However, the program faces several obstacles. The BHCs do not at present cover enough of the population, there are insufficient vaccinators and refrigeration facili- ties, and the necessary equipment to preserve certain vaccines does not for the most part extend beyond the provincial capitals. Even BHCs which have 1/ Ministry of Education has its own doctors for this purpose. - 217 - kerosene refrigerators are often short of vaccinators, vaccine, kerosene, or even all three. 9.45 Tuberculosis is widespread in Afghanistan, and a major program of control is being implemented. Mild cases are to be treated on an out-patient basis, while serious cases are to be hospitalized. 1/ However, the system is incapable of isolating and treating all sufferers. In many cases, "cured" patients are released only to contract the disease again in the face of poor nutrition, congested living conditions and cold winters. A much more cost- effective long run medical approach to be problem lies in immunization. The average treatment (inpatient and outpatient) costs about Af 1,050. Even if the cost drops by half, as intended during the Plan, this is still much higher than vaccination costs. Hence, the BCG immunization program should continue to be emphasized as the primary medical means of attacking TB. (vii) Manpower 9.46 Medical manpower is deficient in both number and quality. However, the needs are not uniform; the shortage is greatest for female nurses and technicians. The ratio of medical support staff to doctors is a low 2.9:1. All evidence points towards an almost total absence of manpower planning. Table 49: MOPH HEALTH MANPOWER AVAILABILITY AND NEEDS 1976/77-1982/83 1982/3 1976/7 Surplus(+)/ Availability Availability Needs Deficit(-) Doctors 1083 2010 1905 + 105 Nurses 1201 1064 1333 - 269 Auxiliary Nurse/ Midwives 99 579 494 + 85 Laboratory Technicians 430 621 907 - 296 Pharmacists 225 558 422 + 136 Compounders 364 523 468 - 120 Sanitarians 244 366 486 - 120 Dentists 135 178 229 - 51 X-ray technicians 119 279 275 + 4 Vaccinators 275 1156 1025 + 131 4175 7334 7544 - 210 Source: Ministry of Public Health. 1/ Current TB hospitals contain only 110 beds, with another 100-bed hospital to be added during the Plan. - 218 - The most critical shortage is in the supply of female staff. There are cur- rently only about 100 auxiliary nurse/midwives, and about 100 female nurses. This is clearly inadequate for a country in which a woman being examined by a man not her husband is almost unthinkable. As a result not only do the wives not use the available facilities, but they do not bring their children. This could reduce the coverage by up to 70 percent of potential patients. The Ministry of Public Health is aware of the problem and is taking special mea- sures to alleviate it. The first is the expansion of formal training programs to increase the supply of nurse/midwives and auxiliary nurse/midwives. How- ever, it is recognized that these programs alone are not the solution, partic- ularly as once trained, there is a strong tendency for nurses to be allocated to hospital staff and remain in Kabul. An additional regional training pro- gram is being established at four Basic Health Centers to take traditional midwives (dais) and school finishers recruited from rural villages, give them two months of basic medical training and send them to work in BHCs near their village. The first such training BHC was opened in June 1977. 9.47 Salaries are a major concern in the health field. Doctors are paid low salaries (Af 2,000 a month) on the assumption they will supplement these through their private clinics. In the cities most do and this is having a considerable impact on the ability of MOPH to send doctors to BHCs in the field. Not only can the doctor not supplement his salary with private practice as profitably as in the capital, but he receives no form of hardship or incen- tive allowance in compensation. In consequence, almost 90 percent of all doctors are in urban centers and almost 80 percent in Kabul. The only rural doctors are those attached to BHCs. There is an urgent need to upgrade the salaries of the medical profession, particularly those who are stationed outside Kabul. The problems with female staff are less tractable and obviously not merely a matter of adequate compensation. A lone woman coming from outside a small town is likely to be regarded with hostility, and will in any case require special accommodations. The approach of recruiting and training local women is a promising avenue of remedying this problem. (viii) Drugs 9.48 About as much money is spent on medicinal drugs in Afghanistan as on all other health activities combined. 1/ For this reason, drugs are a crucial element of national health policy. Currently, the knowledge of the health personnel concerning dispensing of drugs is very limited. Often too many drugs are prescribed, many of which serve the same purpose; in other cases, incorrect drugs are prescribed, while in still others, incorrect quantities. All of this leads to failure of therapy, development of drug resistance, drug toxicity, and an enormous waste of money. 9.49 There are at present almost 600 pharmacies in Afghanistan (see Vol. II, Table 13.1), and many more small bazaar stores that also sell some drugs. Drugs are procured by MOPH for public health services (many drugs are also given to MOPH as foreign assistance), and by about 30 private wholesalers 1/ MSH, Financial Analysis, op. cit., p. 22. - 219 - who import drugs for the pharmacies and bazaar merchants. 1/ All imports are subject to MOPH authorization. Small merchants generally make drugs available without physicians' prescription, which in effect gives many people without access to public health services, some means of health care. 9.50 As drugs are almost the only form of modern health services in reach of many of the population, an assured supply of the most widely used drugs is an effective channel for providing health services. Most drugs are currently imported at a total cost of some $8 million a year, 2/ which is expected to double during the Plan. The Government passed the Generic Drug Law in 1977. Under the Law, all drug imports are to go through the Pharmaceutical Institute to ensure that by 1982 only generic drugs are being imported and distributed. Patent drug imports will only be permitted for those drugs for which no generic equivalent exists. It is expected that this move will save about $3 million, or 15 percent of an import bill that would otherwise amount to about $20 million. 3/ To further reduce drug costs, the establishment of a pharmaceutical factory is also being considered. The savings through domestic production as compared to the competitive import of generic drugs has been estimated to be about 5 percent. 4/ Although a more recent study suggests a better return, given the many higher priority objectives of the MOPH, and the general shortages of managerial capacity in Afghanistan, domestic pro- duction may not be justified at this point in time. D. Family Guidance Services 9.51 In Chapter III, reducing the number of births was identified as a key measure to improving mother and child health. In the presence of effec- tive health programs it is also essential to the long-term economic and social security of Afghanistan. Many forces typically act to reduce fertility - increasing female literacy, later age of first marriage, employment of women, urbanization, rising incomes, and improving health standards themselves - but the question is how rapidly these forces will emerge and how effective they will prove. It appears none of them is likely to be very strong in Afghanistan in the near future, given the low level of development at present and the very restricted role of women in Afghan society. Under such circumstances specific programs aimed at lowering birth rates are called for. 9.52 Afghanistan has not yet formulated an official population policy. The lack of precise population estimates and the imminent census are un- doubtedly part of the reason, as are religious and social considerations. High infant and child mortality motivate parents to have many children to 1/ MSH, Management Support for Rural and Family Health Services, Kabul, 1974, pp. 64-66. 2/ MSH, Financial Analysis op. cit. Graph IV. 3/ MSH, op cit., Graph IV. 4/ MSH, op cit. - 220 - ensure that some survive - particularly sons. The religion teaches that children are gifts of God, and there are strong beliefs, particularly in rural areas, that the decision as to the number of children is not for parents to make. Religious beliefs are still a strong force in Afghanistan and must be reckoned with in any national family guidance strategy. 9.53 Private organizations are, however, permitted to provide family guidance services. The one institution that does so is the Afghan Family Guidance Association (AFGA). It receives no budgetary support from the Gov- ernment, but receives support in kind, including buildings, medical personnel, and exemption from customs duties. All financial costs are supported by a grant from the International Planned Parenthood Federation (IPPF), and assis- tance from USAID. 1/ In keeping with the Government's overall attitude to- wards population planning, AFGA has adopted a low profile. The emphasis is not directed towards reducing the number of children per family per se, but rather emphasizing the benefits for both mother and child from spacing desired births further apart. Consequently, their approach usually emphasizes the nutrition and hygiene aspects of mother and child care, and making women aware that it is possible to space births further apart if they so desire. 9.54 AFGA maintains a network of 37 clinics, of which 9 are full-time clinics in Kabul, and 4 are satellite clinics only open twice weekly with staff from the central clinics. The remaining 24 clinics are located in the provincial capitals of all but one province. In Kabul, the clinics are at- tached to the llother and Child Health Clinics of the Maternity Hospital. 2/ In the provinces, the AFGA clinics are for the most part attached to the provincial hospitals. These hospitals provide MCH services as part of their outpatient services. In four provinces, the MCH services and AFGA are located in separate houses in town, and in two more, AFGA clinics do not operate in conjunction with any MCH services at all. 9.55 Each AFGA clinic theoretically has a staff of six comprising of 1 doctor, 1 nurse/midwife, and 4 so-called family guides. The guides are usually young women who have completed the twelfth class and who function as the principal motivators in the system, talking to mothers waiting to see the doctors in the adjacent MCH clinics about hygiene, nutrition and child care. The subject of birth control is never approached directly; rather its existence is merely alluded to as a means of spacing births. Interested mothers wishing to know more are referred to the AFGA doctor. Ideally each guide spends half her time in the clinic and the other half making door-to- door visits in the town and surrounding villages discussing aspects of family guidance. 1/ One of the conditions for IPPF grants is that the member associations be private organizations. This is part of the reason for the unofficial status of the program. 2/ The chief of the Maternity Hospital in Kabul is also the President of AFGA. This is the only institutional AFGA-MOPH link. - 221 - 9.56 The program is growing rapidly; from 1972 to 1976, the number of visits by contraceptive acceptors rose from 33,277 to 72,660 (see Volume II, Table 13.3). This is an average annual growth rate of over 20 percent. How- ever, such rapid growth has been found in the initial stages of family plan- ning programs in many countries and the impact of the program is still very small - continuing users are believed to number fewer than 30,000 or less than 1 percent of the women in the 15-49 year age range. And these are almost exclusively urban women who already have significantly lower fertility rates than rural women. 1/ 9.57 As with all health services in Afghanistan, the wide dispersion of the population is the greatest obstacle to increased AFGA activities. Only the population of the provincial capitals have relatively easy access to AFGA clinics. Outreach activities to the surrounding countryside are hampered by limited transportation - not only do AFGA guides find it difficult to visit villages beyond 20 km, but for the women in these villages it is even more difficult to come into the provincial centers to collect contraceptives. Nore generally, AFGA faces the same staffing problems as all rural health services - shortages of all staff in general, but female staff (especially nurse/mid- wives) in particular. 9.58 Another problem is the limited knowledge of AFGA's existence. In 1973, only about one in five women had ever heard of AFGA, (only about one in a hundred in rural areas). 2/ This has since undoubtedly improved, as AFGA now has free access to one column a week in a national newspaper and gets two short radio spots a week. These are highly desirable developments that deserve recognition, especially as AFGA and the Government plan to increase these pro- grams to 15 minutes each in later 1977 and ultimately to 30 minutes. AFGA also gets mentions in Ministry of Education programs. Radio programs should prove particularly effective, as many families, and almost all villages, have at least one radio. AFGA also publishes a monthly magazine. 9.59 The desire for some form of birth control is definitely present; over 90 percent of the women and almost 70 percent of the husbands reported being interested in increasing the length of time between pregnancies in a recent survey. 3/ In 1973, only 3.4 percent of the women knew of means of family limitation (14.4 percent urban, 1.6 percent rural), but of these 37.6 percent were reported to be users of some form of contraception (47.8 percent urban, 16.6 percent rural). 4/ AFGA guides say they are generally well-received, and 1/ These estimates do not include users who do not obtain free contracep- tives from AFGA, but buy them in the bazaar. 2/ Source: Afghan Demographic Survey (ADS), Vol. 1. 3/ MSH, The Village Health Worker: The Need and Potential as Determined by Survey in Three Provinces of Afghanistan. January 1977. 4/ ADS, Vol. 1. Of urban users (who comprise over 95 percent of total users), 85 percent used either pill or IUD. - 222 - that people are willing to listen even if they do not come to the clinic to join the program. Only in some of the more inaccessible provinces with higher than average infant mortality do they encounter any hostility. Perhaps some- what surprisingly, AFGA encounters little opposition from the mullahs and vil- lage elders; in fact, mullahs are often the first to bring in their wives. (One confused doctor when confronted by three mullahs who desired contracep- tives for their wives hastily supplied them, only to have the mullahs refuse them on the grounds that the doctor had to perform an examination first!) 9.60 AFGA has no current plans to expand their operations beyond the one remaining uncovered province and some satellite clinics for the wives of gov- ernment employees. Eventually, AFGA clinic services are to be performed by the BHCs and through the VHWs, but the exact nature of the service has not yet been decided upon. Under this system, AFGA's role would be limited to training the personnel for the BHC and outpatient clinics, and providing mass publicity about family guidance services. (Current training is limited to one-month pre-service training courses for doctors, nurses, and guides, and one-week technical refresher courses.) The advantage of this approach is that it utilizes the already existing health infrastructure, and is a potentially cost-effective means of delivering family planning services. However, care must be taken to prevent AFGA and its objectives from getting lost in the broader problems facing MOPR. Special attention must be focused on the need for effective family guidance to ensure that this does not happen, and this requires full recognition at the top of the need both in terms of the contri- bution it can make to improving mother and child health and as a means of preventing rapid population growth. Above all, AFGA and its activities should no longer be confined to a low profile, but rather become an integral part of the general health improvement program. For one thing, this calls for AFGA not having to carry the publicity burden alone. Using the BHCs as distribution points will help solve the logistical problems involved and give many more families access to family planning services. To this end all doctors and female nurses should be given special training in the field of maternal and child health and in the administration of contraceptives as part of their basic training. This would enable the program to be implemented relatively smoothly and not strain the scarce manpower resources of the country. It would also ensure that the system is in place when the need becomes doubly great as population growth begins to accelerate. Ultimately, though, village health workers will have to bear a significant part of the burden of publicizing and distributing contraceptives and a start has been made towards this objective through setting up a training program for them. In addition, there is scope for using the private distribution network and permitting village merchants to act as distributors in return for small retainers. 9.61 Family guidance activities in Afghanistan are crucial to improving the health and welfare of the population. They will be an important means of reducing infant mortality and ensuring better nutrition and care of surviving children. Also, they will substantially improve the health and reduce the mortality of mothers. In time, they may be expected to reduce family size and curtail population growth, in concert with the other factors such as education and income, which play a role. The AFGA represents a successful pilot program - 223 - and it is important that family guidance should obtain the increasing official support it needs to take its place as a key element in the strategy of meeting the basic needs of the population. E. Conclusions 9.62 The public health program has not had a strong impact on the urgent public health situation because of its low level of population coverage, and its neglect of preventive health measures. In the long run, given the limited financial resources and manpower which the MOPH operates with, it is these two deficiencies that will constrain the ability to provide universal quality health care. 9.63 The current low level of population coverage is the direct conse- quence of Afghanistan's dispersed population and the low utilization of exist- ing programs by people with potential access. The latter problem must be of particular concern to MOPH as it implies resources, particularly scarce trained manpower, are not being used efficiently and that a significant increase in coverage can be achieved at little additional cost. Perhaps the main reason existing health facilities are under-utilized is the low quality of medical care - drugs are unavailable and medical staff are lacking or inadequately trained. A large part of this problem in turn, is the lack of adequate finance to keep a full supply of drugs, upgrade facilities and train staff. Every indication is that the well-utilized facilities are also those BHCs and hospi- tals where decent health services are available. The greater and hence more efficient is the use made of existing services - more visits to BHCs, or shorter and more numerous visits to hospitals (particularly outpatient visits) - the more impact the MOPH will have. 9.64 The dispersed nature of Afghanistan's population poses additional problems. Since much of the population lives in small isolated villages the number of BHCs required to reach the majority of the rural population would be extremely large and many centers would be below the minimum efficient size. A low-cost alternative is provided by the Village Health Worker. As Table 50 shows, in the absence of a VHW program, by the end of the Plan the existing system could at most reach 36 percent of the population. Table 50: POPULATION HEALTH COVERAGE 1975/76 - 1985/86 1975/ 1976/ 1977/ 1978/ 1979/ 1980/ 1981/ 1982/ 1983/ 1984/ 1985/ 76 77 78 79 80 81 82 83 84 85 86 1. BHC (No.) 101 107 114 127 141 157 174 193 200 208 217 2. Population with 17,400 17,700 18,100 18,500 18,800 19,200 19,600 20,000 20,400 20,800 21,200 Access (per BHC) 3. Total Coverage - BHC 1,757 1,894 2,063 2,350 2,651 3,034 3,410 3,860 4,o80 4,326 4,600 ('000) 4. VHW (No.) - - 45 180 390 565 1,035 1,500 1,965 2,430 2,895 5. Villages (No.) - - 30 120 260 443 690 1,000 1,310 1,620 1,930 6. Village Population - - 536 546 557 568 580 591 603 615 627 7. Total Coverage VHW - - 16 66 145 252 400 591 790 996 1,210 ('000) 8. Major Urban Coverage 1.54 1.60 1.65 1.71 1.77 1.83 1.90 1.96 2.03 2.10 2.18 (millions) 9. Total Coverage 3.30 3.49 3.73 4.13 4.57 5.12 5.71 6.41 6.90 7.42 7.99 10. Total Population 13.70 14.oo 14.31 14.62 14.95 15.27 15.61 15.95 16.31 16.66 17.03 (millions) 11. Percent Coverage 24.1 25.0 26.1 28.2 30.6 33.5 36.6 40.2 42.3 44.5 46.9 Notes: (1) BHC estimates based on revised Plan projections. 1985/86 estimate based on original Plan projection. (2) Based on average catchment population in Parwan BHC pilot project. Catchment population assumed to increase at 2%. (4) Based on pilot project targets. Annual increment 1983/84 - 1985/86 assumed equal to increment of last year of Plan. (5) See (4). (6) Based on 1976/77 estimate of 525 (10.5 million, 20,000 villages). Assumed to grow in size at rural population growth rate of 2.0% per annum. (8) Population of major urban centers assumed to have access. Largest 14 centers assume 100% access, next 25 centers 50% access, smallest 48, 0% access. Based on adjusted ADS estimates. Urban populations assumed to grow at 3.5%. (10) IBRD estimates - see Vol. II, Part II, Section 1. - 225 - If the VHW pilot program is introduced and implemented according to the present proposals, total coverage would rise to about 40 percent of the population, and within three more years (1985/86) to almost 47 percent of the population. I/ As the number of small villages is very large and they comprise so much of the total population the VHW program is clearly the only viable means of providing widespread health services at low cost. For this reason, it must expand at a much faster rate than currently envisioned if all Afghans are to have access to health services by, say, the end of the next Seven-Year Plan in 1989/90. As the program currently stands, the cost of 1500 VHWs by the end of the Plan is budgeted at Af 33.5 million, only about 2.5 percent of estimated total cost of health programs. 2/ There is clearly room for more rapid expansion. 9.65 Improving the quality of health care in a delivery system undergoing constant expansion with free provision of health services, must inevitably re- sult in soaring costs. Indications are that the annual budget for operating expenses is not being increased rapidly enough to cover needs, to the detri- ment of the quality of public health. Unless the Government is willing to commit itself to the substantial costs of totally free health services, by way of the required budget allocations, free health services will necessarily mean limited health services. The population attaches tremendous importance to health care, and, as surveys have shown, spends large amounts on it. To deny people health sevices for which they are willing to pay, in the name of pro- viding free services, is inconsistent. A fee-for-service system should be introduced. There is every indication that most Afghans would prefer a system under which they paid a modest charge but received good treatment than inade- quate service provided free. For instance, drugs could be charged at cost to help purchase more drugs and a daily inpatient charge could be assessed based on the ability of the patient to pay. The latter would encourage more efficient use of the hospital system. The outpatient/inpatient mix would improve, stays would become shorter and more patients culd be accommodated within the system. This would reduce expansion needs, lower overhead costs per patient, and allow the provision of better service. It is crucial however, that revenue collected under these programs (particularly drugs) be returned to MOPH to allow the pur- chase of future supplies, and not be swallowed up in general government revenues. 9.66 Hospital care is an important element of any modern public health care delivery system, but in Afghanistan it is being overemphasized relative to preventive health programs. Hospitals are primarily suited to the curative 1/ These estimates are for people with potential access, not actual utiliza- tion. In 1976/77, actual utilization of each BHC was only 4,300 visits on average (compared with population with access of 17,700). Also, to the extent the largest BHC catchment areas are already exploited, the above BHC projections may be overestimates. 2/ Assumes all costs borne by MOPH, and includes Af 30.0 million for drugs. The recent introduction of small charges for drugs issued by the VHW should reduce MOPH costs for the VHW program to minimal levels. Per- mitting VHWs to charge for drugs, but not BHCs and hospitals does however introduce an anomaly whereby those paying are probably the poorest groups. - 226 - treatment of episodic illness, not the ongoing problems of malnutrition, con- taminated water and poor environmental hygiene that face most Afghans. Hospital services are subject to significant economies of scale and as a result tend to be concentrated in large urban centers. This makes the distribution of health sevices under such a hospital-oriented system inequitable -- in Afghanistan approximately the same number of urban and rural inhabitants have access to health services despite there being some 6 times as many rural inhabitants. Urban services are undoubtedly of higher quality too, with their more-assured supplies of drugs and manpower. Clearly there is a need to re-structure the system of incentives to trained personnel especially doctors so that they are able to take up positions outside the capital without losing additional income in the process. 9.67 If public health in Afghanistan is to improve in the long-run, the principal causes of poor health - contaminated water, malnutrition, etc. will have to be eliminated. The focus of health care must shift from curative urban-oriented hospital care to the promotion of preventive measures under- taken from within the village on a continuous basis. Unfortunately, recent budget cuts have reflected the opposite - hospital services have been cut much less than other services. This must change because curative care of prevent- able diseases is an enormous waste of resources (the average inpatient costs about Af 4,000 to treat, whereas the cost of providing clean water in rural areas is only about Af 30 per recipient) and is of limited effectiveness. Reorienting the health program towards preventive services entails expanding rural water supply, immunization, and health education programs. (This would not mean an absolute reduction in curative expenditures and indeed the effec- tive coverage of these programs would continue to expand through rationalization and increased efficiency.) Implementation of rural health programs is criti- cally dependent upon successful expansion of the VHW program. In conjunction with the BHC staff the VHWs must assume leadership roles in health education - they must visit homes and schools to discuss the importance of proper nutrition particularly for the young, and to explain the vicious circle of poor environ- mental sanitation, contaminated water, and poor health. 9.68 The health problems of Afghanistan are serious and basic. They call for a public health system that focuses on widespread adoption of simple low- cost preventive health measures and, as the illnesses arising from such con- ditions subside, increasingly devotes itself to problems that require genuine curative measures. The current system has taken the reverse approach with the consequence that health services are inequitably distributed, largely in- appropriate and inefficient. Fortunately there is a new awareness of this and an impressive beginning has been made through the introduction of programs like the BHCs, VHWs, and rural water supply. EIowever, these programs do not as yet get the priority and support they need. Until they do, Afghanistan will continue to have one of the poorest health records in the world. - 227 - PART III: ECONOMIC MANAGEMENT AND FINANCE: FUELING THE DEVELOPMENT PROCESS X. ECONOMIC ADMINISTRATION AND PLANNING XI. DOMESTIC RESOURCES XII. EXTERNAL RESOURCES - 228 - X. ECONOMIC ADMINISTRATION AND PLANNING 10.01 Although there has been considerable change in the past three decades in selected sectors and regions, Afghanistan still has one of the world's lowest per capita income levels, lacks many features of a basic economic infrastructure, has an embryonic planning system and a traditional public administration which is not development oriented. Hundreds of millions of dollars of foreign aid have flowed into the country over the past years to help Afghanistan build roads, industries and irrigation schemes (the USSR has given assistance of about $1.5 billion and the USA about $500 million in less than 20 years), while several thousand experts have attempted to strengthen its capability in managing development plans, programs and projects. However, in many cases these endeavors had little impact on creating an institutional base for development, let alone raising living standards of the population. Had these resources been more effectively used and had the government been able to mobilize domestic resources and manpower to supplement foreign assis- tance, much more could have been accomplished. Many of the past programs were characterized by long delays and wasted resources. As a result, the quality of management of economic development has been generally recognized as one of the major problems facing the Government of Afghanistan and has been the con- stant theme of reports of the World Bank and other donors such as USAID and the UN agencies which have significant involvement with the administration. 10.02 Perhaps the most striking development since the change of regime in 1973 is the realization that the Government of Afghanistan needs to take charge of the country's development and the increasing awareness that the weakness of the administration is the major obstacle to doing so. However, awareness is one thing and action another. It is doubtful whether the administrative system, as it is still currently operating, can absorb and manage the major increase in the pace of development proposed in the First Seven-Year Plan unless further improvements are made in the administrative structures and pro- cedures of the operating Ministries of Government and more attention is paid to strengthening the capacity of those Ministries to prepare and implement development plans, programs and projects. An important first step was taken in late 1977 with the creation of a Department of Administration. This creates the basis for taking the many further measures needed for an effective admin- istrative reform. A. The Role of Public Administration in the Development Process 10.03 The key to the improved implementation of development projects and programs in Afghanistan needs to be sought in the structure, management prac- tices and effectiveness of the Government's administrative machinery. The weakness of Afghanistan's administration is general, whether at the level of project, or sector or the economy as a whole. The capability in preparing and identifying projects is limited while a similar situation of weak performance is found in project implementation where the record is one of considerable delays. Plans are not related to projects at the sectoral level and budgeting is not adequately related to planning. While the economy expands and becomes more complex, the government machinery is still overcentralized and its - 229 - financial and administrative procedures are primarily geared to protecting (unsuccessfully) against fraud and theft in the narrowest sense. Lack of qualified manpower is one of the most serious problems of public administra- tion but systematic training of civil servants is still lacking at all tech- nical and administrative levels. The morale of civil servants is low, and the salary level of the public administration in Afghanistan is one of the lowest of all developing countries. In order to seek new ways of improving public administration management, a step by step review of the administrative machin- ery and procedures should be undertaken. However, as the problem of over- centralization is the outstanding feature of the management practices in Afghanistan, it is of some interest to examine how the political and adminis- trative structure in Afghanistan has evolved in the course of successive Constitutions. (i) The Constitutions and the Government Structure in Afghanistan 10.04 In the early 1930's, King Nadir Shah began the task of establishing a stable government based upon a more permanent foundation than the support of the tribes. On October 31, 1931, he issued a Constitution, copied after the one promulgated in 1923 by Amanullah Khan, a document that was, with minor changes, still in effect until 1964. The Constitution provided for a Cabinet, a Senate and a House of Representatives, and the throne was made hereditary in the family of Nadir Shah. The cabinet, made up of 18 departments, was assigned the practical work of governing the country. In 1949 a new high level council was established. This body, composed of six members headed by the Prime Minister, was given the authority to quicken the decision-making process of the government, pending, of course, the approval of the King. Indeed, the Constitution placed the King at the head of the executive, legislature and judiciary and gave him the power to appoint the Prime Minister, approve the appointment of all officials, and more especially, make laws by fiat in times of emergency. This wide range of legal powers concentrated in one hand, in practice, left the legislature with little but consultative responsibility. 10.05 Prime Minister Daoud in his farewell speech in March 1963 reviewed the progress of the country under his ten-year administration and pointed to the problems of the future. He called for increased participation by the Afghan people in their government and the separation of the executive, legis- lative, and judicial powers. This proposal was accepted by the King, a new Constitution was prepared by the Loya Jirga (national assembly) for approval, and was promulgated in September 1964. The new constitution appeared to bring substantial political change and some hope for the founding of democracy in Afghanistan. Legislative authority was in the hands of parliament consisting of a Council of People (Wolesi Jirgah) and a Council of "Elders" (Meshrand Jirgah). A major innovation of the new Constitution was that no member of the Royal family could serve as Prime Minister, nor as Chief Justice (the head of the Supreme Court). However, behind the facade of this new parliamentary monarchy, the practices of the regime did not change significantly. The executive and legislative organs remained in the hands of the King and his entourage or his extended family. - 230 - 10.06 On January 30, 1977, a new Constitution was approved by the Loya Jirgah. General Daoud, brother-in-law and cousin of the former King Zahir Shah, who has held power since July 1973, became the first President of the Republican State of Afghanistan. President Daoud declared in 1973, that pol- itical stability and the elimination of corruption and nepotism together with the restoration of democracy in the country were among his major objectives. The elaboration of the constitution was by a special commission of 20 members personally chosen by President Daoud. The Constitution provides the basis for a presidential regime with clearly separated powers between the executive and legislative branches. It is a one-party system controlled by the National Revolution Party. In principle, the Constitution provides for a parliament of two houses namely the Melli Jirgah or National Assembly, and the Loya Jirgah, or the Upper House, but only the first one is to meet regularly. The Loya Jirgah is to be called on in exceptional cases by the President of the Republic. 10.07 The Constitution thus provides for the restoration of democracy, but only within the limits of the objective of political stability through central control. The representatives of the Melli Jirgah will be selected and nominated by the Revolutionary Party. The composition of the Melli Jirgah was still unclear at the time of writing, but the constitution states that about 50 percent of the representatives have to be "workers and farmers". The Loya Jirgah, or "Chamber of Elders" will consist of about 350 elected deputies, including all the members of the Melli Jirgah, about 50 leading Afghans, such as former ministers, members of the Central Council of the Revolution, members of the Supreme Court and of the High Council of the Armed Forces, 5 to 8 rep- resentatives from each province (there are 26 provinces), and finally 30 members appointed by decree of the President of the Republic, mainly composed of 'progressive' civilians and military men. 10.08 According to the Constitution, the major function of the National Assembly (Melli Jirgah) is to take the necessary decisions on the budget and "on draft laws proposed by the government and the judicial organ." The assembly is to hold its regular session during four consecutive months in a year. The government may draft and prepare ordinances for regulating urgent matters, during the eight following months. The Loya Jirgah which is "the supreme manifestation of the power and the will of the people" does not meet regularly, but is to be convened by a decree of the President of the Republic who is its Chairman. This assembly will meet in special circumstances such as the amendment of the Constitution, the election or the acceptance of the resignation of the President of the Republic, and "any other important events". The Loya Jirgah has grown out of the traditional assembly of the Pashtun tribes. The number of representatives was unlimited and assembled only at times of extraordinary events, or to approve a new King. The last time it was summoned was in 1964 to approve the Constitution granted by the King, and previously in 1940 when Afghanistan declared its neutrality in the Second World War. 10.09 The main question to be answered by the way the system works in practice relates to the role of the National Assembly. On the question of government responsibility vis-a-vis the National Assembly, the Constitution makes the general statement: "the ministers shall be responsible to the - 231 - President of the Republic, the Central Council of the Party and the Melli Jirgah in respect of the performance of their duties." The President of the Republic has the power to dissolve by decree the National Assembly. Moreover, the President of the Republic also functions as head of State, head of the government, Chief of Army and Military Defense, Minister of Foreign Affairs and is head of the National Revolution Party. By end-1977 there was still uncertainty about the composition of the Government. The Constitution states that the Government is the supreme executive and administrative organ of the state and consists of "the Vice President or Vice Presidents" of the Republic and the Ministers. A Vice President was appointed in early 1978, though as of the time of writing his functions were not clearly defined. 10.10 Finally, the composition of the parliament raises some serious ques- tions on whether it will be able to overcome its particularism and conservatism in order to help the Government carry out successfully its economic and social development program, e.g., vote the National Budget or the Administrative Reform without delay. A great majority of the representatives of the National Assembly have always lived and studied in the rural areas or in the provincial towns. Many of the delegates were designated by acclamation during village meetings. It is obvious then that the more influential man has the best chance to be selected. It is, therefore, likely that conservatism will still prevail in the new National Assembly as it did in the former Wolesi Jirgah, before 1973. That body was notorious for its unwillingness to take decisions on anything. For instance, the third Five-Year Plan, which was presented in 1967 to the parliament had not been approved, nor had the budgets of the years 1969/70 and 1970/71 been voted, by 1973. Traditionalism linked to tribal interests and lack of proper party organization were the major characteristics of the former assembly. The situation suggested that there were few people outside the small Kabul elite who had a clear perception of a national in- terest which might prevail over local interests when the situation demanded. The test of the new constitution will be the extent to which the Melli Jirgah can be transformed into an effective and responsive body - the basis for further advances towards democracy in Afghanistan. (ii) The Administrative Machinery 10.11 According to the Constitution, the administration of Afghanistan is based upon "the principle of centralization in accordance with the provision of the law, and the capital of Afghanistan is the city of Kabul." The search for unity and stability has been the leitmotiv of modern Afghan leaders. The whole administrative system in Afghanistan is based on the principle of control by the state over the different regions of the country and the tribes who compose the Afghan ethnological mosaic. Therefore, public administration in Afghanistan still remains primarily oriented towards maintaining law and order and has not yet been significantly directed towards development needs. 10.12 The administration is conducted by the President of the Republic and his Cabinet, composed of 15 ministers, with the portfolios of Foreign Affairs, Interior, Justice, Education, Finance, Commerce, Public Works, Information and Culture, Communications, Public Health, Agriculture, Mines and Industries, Frontier Affairs, Planning and the newly created Ministry of Water - 232 - and Power. For purposes of regional administration, Afghanistan is at present divided into 26 provinces. 1/ The Ministry of Interior exercises general direction and control, through an appointed Governor, over provincial affairs, but other ministries, including the Ministry of Finance, have sub-agencies or line agencies and staffs in each province. The 26 provinces are subdivided into 325 administrative districts or Woleswali but control remains with the provincial offices. The large municipalities do, however, possess a substan- tial amount of autonomy in the conduct of local affairs. At the bottom of the administrative hierarchy are the villages or Alakadar; there are about 20,000 settled villages or nomadic units in the country representing an estimated 85 percent of the total population. (iii) The Civil Service System 10.13 In examining the management of economic development in Afghanistan we need to look at the system of civil administration. The system is based on the procedures and regulations prescribed in the National Civil Service Law. All civil servants, whether in the central ministries or in the provincial agencies operate within similar systems of recruitment, grading and remuner- ation. Many of the problems of morale, salary and effectiveness relate to these personnel practices of the Civil Service. Despite some improvement over past practices, the present Civil Service Law, which was enacted in 1970, does not provide a framework for efficient management. Much time and expertise has already been devoted to these matters apparently without any major improvement in the situation. A new Civil Service Law has been drafted and an overall administrative reform is under discussion in the Government. 10.14 Salaries: The Civil Service in Afghanistan has a uniformly graded system with a hierarchy of 10 ranks. The ranks begin with the Deputy Minis- ters and Provincial Governors (rank 1), followed by the Presidents (heads of each department) and the Chief Provincial Finance Officers (rank 2). Directors-General are rank.3 and Directors ranks 4 and 5. Ranks 8 to 10 relate to clerical positions. A 12th grade education is needed for entry at rank 10, a University degree for entry at rank 9 and a Master's Degree for entry at rank 8. Contract employees (ajceran) have a hierarchy of 11 ranks. The system of classification is thus rather simple and applied uniformly to the 90,000 government employees. To each rank corresponds a salary level. For the permanent civil service employees, the monthly salaries range from Af 1,600 ($34) for rank 10, to Af 6,000 ($126) for rank 1. A Deputy Minister thus has a monthly salary of $126 while a Minister (out of rank) can earn up to $220. Contract employees have monthly salaries which can vary from Af 940 ($20) for rank 11 to Af 4,250 ($89) for the top rank. 1/ Until the 1950s the country was divided into five major provinces or Wilayat, and four minor provinces, or Hakumat-i-Ala. In the 1960s, Afghanistan was divided into 18 major regions of which seven were pro- vinces, headed by Governors, and 11 were regions with a High Commissioner as head. The Constitution of 1964 redivided the country into 29 provinces and the number was subsequently reduced to 26. - 233 - 10.15 Prior to 1976, the salaries of the civil servants had not changed since 1964 and had not even been adjusted for the rise in the cost of living. A Deputy Minister or a Governor had a monthly salary of Af 5,700 in 1964, now they earn Af 6,000. A Director-General earned Af 3,900 a month, and since last year this salary has been raised to Af 4,250. (In real terms the 1977 salaries represent a decline of at least 50 percent as compared to the late 1960s.) The civil service employees have some additional benefits such as access to cooperatives from which they can buy essential commodities at sub- sidized prices. However, the Government does not provide housing for civil servants. Cars are provided for official use of the highest ranks while free transportation to and from work is available for all ministerial officials. Many senior civil servants come from families with sufficient wealth either in rural land or urban property to support the extremely low salary level. But senior officials are few and for the great majority of the civil servants who are below rank and 4 and who receive something like $70 a month or less, the problem is severe. 10.16 The low salary level has, of course, a direct influence on the morale of the civil servant. The low level of government salaries in Afghanistan as in many other developing countries has contributed to corruption in some quar- ters of the bureaucracy. The impact of corruption in Afghanistan is more serious than appears on the surface because it tends to create a lobby for unnecessarily complex bureaucratic procedures. An example of this is commer- cial licensing: to obtain a license to trade takes at least a month besides which there is an official tax to be paid and the applicant can expect to pay "informal taxes" or "expediency charges" at each of the 17 or 18 offices to which he may have to apply along the way. One of the other consequences of these low salaries is that ministries do not attract highly qualified and, most of all, experienced people. A number of well-educated people have emigrated to the Gulf Emirates, Iran or to western countries. Low salaries also create discontent and frustration. For instance, a Director of rank 4 who is earning Af 3,050 a month ($64) probably has to pay Af 1,800 for the rent of his house, Af 700 for servants, Af 600 for utilities, over Af 1,000 for heating in winter time, about Af 300 for taxes. Even excluding food, clothing, vehicles etc. he would be far over his monthly earnings in the ministry. There is another problem linked to the salaries. An engineer who has a field assignment does not receive significant compensation for the hard- ship or frustration of being isolated from his family, sometimes for months or more. He must rent a home, and cover his various field expenses from essen- tially the same salary of $50 to $80 a month he would earn in Kabul. 10.17 Any increase in salaries must, however, come within the context of changes in the present system of promotion, so that financial incentives are related to ability and performance and not merely to seniority as at present. The main alternative to the civil service for a talented Afghan at present is to find employment outside the country. The increase in salaries required to match those abroad is not feasible at present in a country which is at so early a stage of development as Afghanistan. Nevertheless, it is reasonable to think that if the system was amended to allow the best people to progress more rapidly while paying significantly higher salaries at upper levels or to government officials who are more highly qualified or posted out - 234 - of Kabul, some of the many able Afghans who are presently working abroad might be motivated to return. (Specific proposals on appropriate changes in the salary structure are elaborated in Chapter XIII.) 10.18 Personnel Management: The system of personnel management in the civil service of Afghanistan has evolved with very little conscious attention being paid to how it relates to the objectives of development administration. Recruitment, transfers and promotions appear to a large extent to be arbi- trary and there is little incentive for civil servants to acquire qualifica- tions to further their prospects. Within each ministry, the civil service system is largely operated by a separate department of administration. A first important consequence is that operating officials responsible for the accomplishment of programs in other departments have little influence over the appointment, promotion, transfer, or separation of employees. 10.19 As far as recruitment is concerned, there is a distinction between technical or professional personnel, and administrative or general personnel or clerks. As there are few general civil service openings and a large pool of eligible people, vacancies are filled in principle in the following order: (i) suitably qualified personnel who have been displaced from their jobs for one reason or another, (ii) qualified personnel from the university or another ministry (if the transfer is approved by the Minister himself), and finally (iii) the unemployed. In practice word of mouth is also of great importance since there is no civil service list of eligible candidates, nor does the con- cerned ministry's department of administration maintain an application list. No public announcement of openings for ranks 11 and 12 is made to avoid being submerged with candidates. Selection of 12th grade graduates who enter at rank 10, is also largely done on the basis of informal inter-personal com- munication. In general, however, preference is given to those who have been displaced from employment in other departments or ministries. Recruitment of 12th grade and university graduates (who enter at rank 9) was, until late 1977 done, curiously enough, by the manpower division of the Central Statistical Organization (CSO) to which these functions had been transferred from the Ministry of Planning. Fortunately a new Department has been set up to deal with recruitment, so that the CSO can concentrate on its statistical functions. The Government regards itself as committed to finding places for all university graduates and in practice has sought to place high school graduates as well. This means placing about 12,000 job seekers each year, which exceeds the number of openings at present despite shortages of virtually all kinds of trained personnel. 10.20 Starting salaries in Afghanistan are low as mentioned earlier, and the incremental steps are insignificant and infrequent. Employees are eligible for promotion every two to four years. There is a rating for performance in eight categories and judgments are given by two of the civil service super- visors with an average rating required to receive a step salary increase. Promotion to the next rank must be approved by a higher authority, the Council of Ministers, or the President if the highest ranks are involved. In case of poor job performance, transfer is the usual form of punishment. If a civil servant has not been promoted after ten years, he or she is likely to be fired. - 235 - Redundant personnel must be placed in new positions or the Ministry must con- tinue to pay their salary for one year if they remain unemployed. It happens often that an employee or senior official may be moved into a higher position on a temporary basis and receive the salary of the position but not the offi- cial rank, sometimes for more than two years. The prescribed procedures for personnel transactions are lengthy and redundant in the extreme. For instance, according to a study made in the 1960s, it was revealed that a promotion transaction in a ministry required 54 operations, 20 reviews or inspections and 73 movements of documents from one place to another. When the promotion concerned a civil servant assigned to a provincial agency, an additional 41 steps were required. No changes have been made in these procedures since the time the study was carried out. 10.21 Another basic gap in the system is the absence of any provision for classification of positions or definition of functions. In the absence of a classification system, there is no information available as to the nature and responsibility of the various positions or of the qualifications required. The positions of the 90,000 civil service personnel and contract employees are identified only by their organizational unit or department and the ranks attributed to them. Consequently, assignments of officials are often made arbitrarily by the Department of Administration of the Ministry without any consultation with either the employee or his supervisor. Moreover, managers frequently have quite ill-defined ideas about staffing levels and patterns. Another problem is that the purpose or function of the various organizational units themselves has not been adequately defined and consequently the struc- ture of the organization is not sufficiently related to the functions to be performed. A very important weakness that is clearly related to the absence of definition is the lack of responsibility for performance. Because func- tions are not clearly defined and organizational responsibility for their performance is not clearly assigned, individual officials are not held respon- sible for accomplishment or failure in specific work areas. It can also be said that many officials do not have a sense of responsibility towards their work. One of the common devices for avoiding individual responsibility is the use of frequent committee meetings. Decisions that should be made by the individual administrator responsible for a particular function are instead made by an impersonal committee decision. The use of committee is not to provide different points of view for consideration and discussion or to provide information. The committees rather attempt to reach decisions by consensus from which there is no expressed dissent. Unfortunately, these procedures can indefinitely delay the reaching of a decision if one or two officials continue to disagree with the majority view. 10.22 Another important point relates to the position and functions of the Departments of Administration within the Ministries. These Departments of Administration operate the Civil Service System. In fact, they also manage the "service" functions of the Ministry which include budgeting, accounting, supply and general service operations. In general these Departments of Administration have regarded their functions as an end in themselves without relating them to the functions of the various operating departments of the Ministry. The consequences are that employees are assigned, transferred and promoted with little regard to their qualifications or suitability for the - 236 - task to be performed, that budgets have little relation to the tasks of the departments concerned and that supplies are safeguarded to the point where they become unavailable when they are needed. A restructuring of the Personnel Management system will have to take these anomalies into account. 10.23 These procedures have led to significant bottlenecks in public admin- istration. The lack of delegation of authority or responsibility, means that even the most minor decisions and petty administrative details must come before the top levels of management. One effect of this excessive concentration of decision-making in the hands of a few selected senior officials is to enforce subservience by less-senior officials rather than to encourage initiative. Another effect is to over-burden the top levels of the Ministries with work. Every administrator at the upper level is faced with large numbers of docu- ments requiring his signature. Most documents are signed repeatedly by many officials resulting in lengthy delays in accomplishing the simplest act. This is again a way of avoiding individual responsibility, while at the same time, limiting the effective use of the decision-making capabilities of the junior staff at the Ministry. The quality of the junior professionals in the Minis- tries is often very good and they would be qualified to take over parts of the heavy burden of the senior officials. Unfortunately, the low salaries paid to them (e.g., a Director-General with a Master's Degree from a foreign University is paid around US$70 a month), the limited use that is made of their qualifica- tions, skills and initiative and their low level of participation in the whole process of training and decision making, has often resulted in low morale and poor job motivation. The effect of this is reflected in the brain drain from Afghanistan. Probably over 60% of those with international training, do not seek employment with the Government and, because of the few jobs available in private industry, either find occupations in fields unrelated to their quali- fications and professional background or migrate to other countries. (iv) Procurement and Supply Systems 10.24 Although some elementary materials management system does exist in the ministries and agencies, the existing system and procedures are so com- plicated that they often create serious bottlenecks in the management of programs and projects. The supply management system including procurement, warehousing, issuing of property records, etc. is based upon the fear of loss through theft or misuse. The system of warehousing is a typical example. Supplies which are locked in a warehouse can only be obtained through the tahwildar (a bonded stock-keeper). Having assumed personal liability for the material entrusted to him in return for his salary, the tahwildar is under- standably reluctant to release the supplies requested. This system has major shortcomings: (i) since the stock-keeper is seldom, if ever, on the premises, he must first be located and sent to search his storeroom. If he is sick, on leave or otherwise unavailable, no material can be taken from the warehouse, and therefore, long delays are not uncommon; (ii) since the tahwildar himself has very little experience or familiarity with the proper identifica- tion, storage, or handling of technical supplies, the Ministry's stores are generally poorly kept. In addition separate storerooms are kept for different groups of supplies e.g. furniture, spare parts, construction materials, etc.. For these reasons, locating any item is often time-consuming and the time to fill any request for more than one type of material gets mu Itiplied accordingly; - 237 - finally, (iii) as a consequence of these factors, although losses due to theft are low, inefficiency remains high, resulting in services, materials or goods such as spare parts being delivered late and financial losses incurred because of the unavailability of too securely locked materials. The problem is particularly acute in the state enterprises where delays in obtaining supplies which are stored in a warehouse have resulted in substantial production losses in a number of cases. (v) Financial Management 10.25 The performance of the public sector management in Afghanistan is not only related to the improvement of the civil service system or the materials management regulations and procedures. Improvement in financial management is also a prerequisite for better management of the economy. The state of financial management is such in Afghanistan that the opportunities for improvement still appear to be limitless in spite of many years of effort and technical assistance. As resource limitations become increasingly criti- cal these financial and budget procedures will become still more important. More effort has to be focused on the various components of the financial system, i.e., accounting, budgeting and revenue collection. The Government's ability to manage the economy is closely related to a significant improve- ment in the ability to account for and report income and expenditure, and to budget its scarce resources. 10.26 Accounting: Modern accounting is still far from being commonly used in enterprises and public administration and accepted as a necessary tool for sound management. There are at least three criteria for determining the effec- tiveness of a nation's system of accounting: (i) it should provide the gov- ernment with complete, current and accurate financial information; (ii) with that information available, it should provide a control and safeguard for the fiscal resources of the nation, and (iii) it should as far as possible assist rather than impede the operations of the government. The present accounting procedures and practices do not yet measure up to these criteria. Like the civil service system, the accounting system in Afghanistan still requires frequent duplications in the recording of transactions, multiple signatures (up to 30 to 40) for essentially routine transactions, and interpolation of the Ministry of Finance, through the Mostafiat at the provincial level, and the Ministry of Planning (for the development budget) in routine transactions already approved in the Budget. The procedures are generally too centralized, slow, detailed and expensive. In the state enterprise sector it is virtually impossible to determine the precise amount of initial and subsequent govern- ment investment or the return, since they provide either inadequate financial data or none at all. The data that is available is incomplete, misleading, often late, and in most of the cases not based on double-entry bookkeeping. The poor management of state enterprises and development projects has many causes but one of them is simply the lack of proper budgeting and control based on a sound accounting system and procedures. 1/ 1/ The financial management of the state enterprises is discussed at length in Chapters VI and XI. - 238 - 10.27 Since 1957, teams of American experts sponsored by AID have been working to improve the accounting and budgeting techniques used by government agencies. Their reports have recommended the use of modern accounting tech- niques and the decentralization of selected accounting activities. In December 1958 a new accounting system won cabinet approval and a new law, the Budget and Accounting Act, was adopted in early 1959 to become effective in the fiscal year 1959/60. Manuals were prepared and courses were given for agency fiscal officers and chief financial accounting officers. The new system introduced procedures such as obligation accounting and centralization of disbursement in the Treasury Department of the Finance Ministry with respon- sibility of each government agency for expenditure control within its own allocations. Moreover, detailed instructions and forms were developed for imprest cash funds accounting and control, and revisions were made to individ- ual pay and deduction records and payroll forms were prepared. Relationships with key agencies such as the Da Afghanistan Bank were clarified. In 1961 a revised accounting manual was distributed to all agencies. 10.28 However, major improvements in accounting procedures were still needed and it was not until 1964 that the Ministry of Finance approved a system of double-entry accounting that was supposed to increase fiscal control through the establishment of general ledgers at the ministry level as well as at the financial and agency level. The new system was described in detail in a manual that was widely distributed to all accounting units, and an Office of Systems and Procedures was established in the Accounting Department of the Ministry of Finance. Teams of Afghan experts assisted by a Peace Corps volunteer accountant visited each province and each central agency. It took four years of constant effort to introduce the new techniques in most of the provinces and agencies but it took only a few months for the double-entry system to be abandoned after it was decided not to send any more teams into the field. The ledger system was also only partly implemented. Four years of training in basic accounting techniques was apparently not sufficient to bring significant changes in past procedures. But this does not mean that new efforts must not be undertaken again. Perhaps one of the solutions would be to link accounting techniques with budgeting procedures through both formal and on-the-job train- ing. Since the various ad hoc training programs have not so far brought major changes in the traditional accounting procedures, a more systematic and per- manent training program in Administration and Economic Management will have to be developed and institutionalized in Afghanistan. In late 1977 decisions were at last taken on setting up Institutes for these purposes. 10.29 Budgets and Budgeting: Along with accounting, budgeting is also an important area to be reviewed and defined within the financial management framework. The relationship between accounting and the Budget cannot be ignored. Sound accounting techniques are the premises of sound budgeting and control. The Budget is the vital centerpiece of plans, programs and projects. A national Budget is the government's proposed expenditures and the manner in which it intends to finance them. Once enacted, the Budget is a checklist of the only purposes for which money can legally be expended and should be a major instrument to aid administrators in accomplishing their goals and assure executives the control they need in their programs. Although much attention has been devoted to this area of financial management, budgeting - 239 - systems and procedures in Afghanistan have not yet been developed as a useful tool for management of the economy. The Budget is used primarily as an instrument of control over expenditures. The Budget is hardly related to performance, and the fact that budgeting is a cyclical and continuous process is not well understood or sufficiently taken into account by the Government. 10.30 The first problem is that of budgetary classification. Most Min- istries utilize funds from two separate budgetary sources, the Ordinary and the Development Budget. Responsibility for overall Budget preparation is divided between the Ministries of Finance and Planning, and within every Ministry, between the Administration Department and the Planning and Coord- ination Department. The development budget, administered by the Ministry of Planning, is intended primarily for investment, while the other source of funds is the Government's Ordinary Budget, administered by the Ministry of Finance. This budget is chiefly used to cover the operating expenses of government programs, such as salaries, supplies. rental charges and other operating costs. Although there is a distinction between the Ordinary and Development Budgets in the Annual Government Budget this is not equivalent to a clear separation between operating expenses and capital investments. No definition of development expenditure has been made, with the result that there is some difficulty in discovering which items should be allocated to each budget. The lack of a clear distinction between development and non- development expenditures necessarily introduce some confusion in the account- ing system. If the government wishes to maintain the present two-budget system, there would be advantages in development expenditures being better defined for financial purposes. 10.31 Because the Ordinary and Development Budgets are prepared separately, account is not always taken of the impact of capital outlays on recurrent expenditures. At the central level, the Ministry of Planning and the Ministry of Finance usually prepare separate estimates of resources which often vary significantly. At the sectoral level, in almost every instance, the department within a ministry which is concerned with the preparation of the investment program is separated from the unit concerned with the preparation of the ordinary budget. The ordinary budget is prepared by the Ministry's Adminis- tration Department while the development budget is prepared by the Planning and Coordination Department of the concerned ministry. The problem here is that the whole process of budgeting recurrent expenditures is centralized in the Administration Department while the operating departments are hardly involved in the budget preparation apart from providing the necessary infor- mation. There are no general interdepartmental discussions on past budgetary performance through which some consensus could be reached. The lack of proper assessment and influence on recurrent budgetary requirements by the operating departments can lead to extreme inefficiencies. The classic case is that of the coal mines (the Northern Coal Department of the Ministry of Mines and Industry) which have hardly operated in the past, because the norm wage they were permitted to pay was too low to attract labor to such a difficdlt environ- ment. Irrigation projects were built and completed but only a fraction of their capacity was utilized due to inadequate provisions in the Ordinary Budget to operate and maintain them. The situation is somewhat better in-the case of the Development Budget. As Development budgets are established by - 240 - project, budget estimates can more easily be discussed among the departments and aggregated by the Planning Department. Subsequently the Planning Department can better assume a coordinating function among the operating departments than in the case of the Administration Department with the preparation of the Ordinary Budget. 10.32 There is another immediate problem related to the existing system, that is the relation between budgetary appropriations and the implementation of programs. Although the development budget is organized by project, little reliable data are available on which to base any sound judgment about the performance of the project. In general, there is no detail provided for any project even the largest other than the object of expenditure breakdown (cement, bricks, trucks, etc.). Nevertheless, the problem is more acute with the Ordinary Budget because at least the Development Budget has an embryonic system of control of expenditures based on compilation of data according to project. Since the Ordinary Budget only employs an object classification system, it is extremely difficult to determine how much is allocated in this budget to specific projects. The Budget Department in the Ministry of Finance allocates lump sums to each Ministry and agency according to object classifi- cation, and each operating organization distributes its allocations among its projects and programs in accordance with its own needs or desires. Conse- quently, any analysis of the impact of recurrent expenditures becomes meaning- less when appropriations are made according to objects of expenditure, such as salaries, spare parts, typewriters, bicycle tires, travel and subsistence, etc. At present, the only way to review the program of the Ordinary Budget of a Ministry would be to calculate the total amount of expenditures for each object, item by item, and to compare, object by object, this total amount with the past years' figures. It makes little sense to do this. The use of object classification for budgeting and accounting merely highlights the means of doing things and not what is sought to be done or what is actually done. It tends to obscure the identity of programs and renders it difficult, if not impossible to ascertain results derived from expenditures. These deficiencies in the existing system of budgeting in Afghanistan are partly responsible for the wide gap which exists between the Plan and the Budget. 10.33 Besides inadequate classification systems, sound financial management is hampered by complex procedures which inevitably lead to a great amount of paperwork and duplication of tasks. For instance, an area of budget management which has proved to be a major cause of delay in the implementation of programs and projects is the procedures related to disbursement of funds. Authorizing a disbursement is not an easy matter. It should be noted that in Afghanistan the Annual Development Budget is set and spent entirely at the central level while the Ordinary Budget involves a transfer of funds to and from the provin- cial and local levels as well. After approval by the Budget Department of the Ministry of Finance of its Ordinary Budget, the Ministry's Administration Department informs the provincial agencies of the annual budgetary provision for their province. Once the provincial budget has been allocated, the provincial agencies have the authorization to allocate funds between the different district agencies for the purchase of a few necessary item or minor office supplies. Disbursement is generally based on a quarterly release of funds and in some cases, on a monthly transfer. Disbursement of funds is in - 241 - principle easy at the provincial and district level, provided of course that the necessary paper work is completed. But this is precisely the problem; extensive documentation is required before funds are released for salaries, repairs or for locally purchased supplies and equipment. For instance, after the local director of an agency has determined the amount of money needed, the request has to be forwarded to the Mostafiat (the district finance office) through filling in various forms, three copies of form M-10, two copies of form M-11, two copies of form M-12 and three copies of form M-16. In the last stage of the process, nine signatures are needed to endorse the forms by each official involved, the local director, the official who has applied for the money, the accounting officials and finally the controller (Tadayat) of the district Finance Office (Mostafiat). 10.34 The mere purchase of a basic item involves so many tedious proced- ures that they are worth describing step by step. A foreign expert recently described the case of an extension agent who needs a new rear tire for his bicycle. First, the extension agent initiates a requisition to be sent to provincial director of agriculture and extension. When the request is ap- proved according to the provision of the existing quarterly fund allocation for the agency, the Director appoints a committee of three people to estab- lish whether the new tire is needed. When the committee agrees that the tire needs to be changed, the Director orders his clerk to make an office memo and prepare the necessary documents with five copies. He writes a check after careful review by the finance officer. The accountant, the clerk- budget officer, and the purchasing officer who finally has to authorize the check to be drawn, looks at the budget to make sure money is in the line item. Then the comptroller approves it and sends to the mostafi (finance officer) who signs along with the controller and the purchasing officer (three signatures are needed). The tahwildar gets money from the Bank and informs the Governor's committee which is made up of at least three senior officers, e.g., Director General of Education, Agriculture, etc. The Gov- ernor's committee goes to the bazaar with the tawildar and bargains for the tire. When the tire is selected the Governor's committee signs a paper that authorizes the purchase of the tire. The tire is purchased and registered in the tawildar's name. The extension agent, who has been waiting all this time, makes a request for the tire when it arrives. The Director of the Agency approves the extension agent's request and the tire is finally placed on the bicycle. (If the tire were for a car the committee would have to certify that the tire purchased was placed on the right car). Aside from the complexity of the procedure and the attitude of general mistrust, there are two other glaring problems with the process: (i) usually only one person is authorized to perform a certain function, especially the more responsible functions such as check writing. If that person is not available or too busy, the whole process stops, and (ii) since the Governor's committee is made up of high officials in the provincial administration it is often difficult for them to find time to get together. 10.35 Before funds are actually released for a program, expenditures for the previous quarter have to be documented. If a program has been unable to spend its previous allocation (partly because of the complexity of the regula- tions to be followed) it may lose some or all of its next allotment. Since - 242 - there is no carry-over, time-consuming expenditures such as construction and procurement suffer. Because it takes time before the amount budgeted becomes available, the program officers usually make an estimate of the work which is still to be accomplished in the field in order to include the amount in the next budget. Due to the fact that any required expenditure which has not been explicitly included in the line-item annual budget is extremely difficult to obtain, the Ministry's Administration Department generally have to over-estimate the amount which can be utilized and which must be included in the next annual budget to finish the current work. Nothing can be spent for which there is no budgetary allocation. Unfortunately, the budgetary system does not allow any transfer from one item to another, even within the Ministry's allocation. 10.36 Such outdated and complex bureaucratic procedures seriously hamper the flow of disbursements while falling far short of what is presumably their main rationale, i.e. establishing effective financial control over expenditures. These practices are inadequate to the growing volume of expenditures handled by government agencies. The budget is still used as an instrument of accounting control over expenditure and is not adequately related to performance except in the most general way. Apart from the paperwork involved, the existing practice might seem on the surface to provide for adequate control from the central level. For instance all the documentation on local agency expenditure is aggregated by the district Finance Officer (Woleswali) and reported monthly to the corresponding Ministry and to the Ministry of Finance. At the same time the local line agency office has to send a monthly report on expenditures directly to the administration department of its Ministry. However, the feed- back of information received by the Mlinistry from the field does not lend itself to assessing the progress of the programs executed by the Agencies through the Ordinary budget. Similarly financial control over development expenditures may seem to be efficient because of the use of a quarterly reporting system. The Ministry of Planning has to approve the release of funds for a project or program on the basis of a quarterly report. But the poor quality of information received, the lengthy procedures and excessive delays in reporting the implementation progress of a project do not allow for the adequate monitoring of projects, thus seriously hampering the whole planning process. in. 37 Audit of government accounts is another means of financial control in need of improvement. The problems involved in auditing are related to the lack of clear definition of the function of the Auditing Department of what was until recently the Prime Minister's office. A great deal of post-audit time is wasted upon unravelling past transactions (sometimes up to thirty years) which nobody can remember. The audit department's role is still seen as preventing thefts and dishonesty. Another reason for inadequate auditing is that the civil servants involved in auditing are generally ignorant of even the basic principles of accounting, not to speak of the techniques of auditing accounts. The operations of the audit department have had a serious negative effect on the initiative of Government officials. There is often a relentless pursuit of trivial amounts while major waste goes unattended. An official who gets a vehicle repaired, for example, through using funds from another account is liable to find himself in trouble. It is far better to have broken equip- ment unrepaired till parts and labor can be budgeted. Major changes are needed in this important area of financial operations. _ 243 - (vi) Management Development 10.38 Of all the administrative problems of Afghanistan the low quality of management and the lack of qualified manpower is certainly the most alarm- ing. To improve the administrative procedures without training sufficient people to implement them is meaningless. But it is also true that the people who have been trained will not accomplish their task properly if administrative bottlenecks are not removed. The shortage of well trained administrators in Afghanistan is significant and pervades almost all levels of the Civil Service. 10.39 Until recently, there has been no office within the Ministries that regularly addresses the training of civil servants and no internal procedural or administrative regulations that could institutionalize the training process. All the training courses which have been undertaken so far by the Ministries were done on an ad hoc basis to respond to certain definite needs (e.g., in accounting) and without adequate advance planning. The course contents were often too specialized and did not sufficiently take into account the need to train the Afghan officials in modern administrative procedures and in the basic principles of management which should be common throughout the public administration. Training programs have had to be based on unreliable infor- mation about skill requirements. The problem is complicated by the fact that there is an acute shortage of professional people who could teach and con- tribute to the design of training programs. This will have to be dealt with through expatriate support. The proposed administrative institutes are an important element in addressing the training problem. (vii) Conclusions 10.40 It is impossible to overstate the urgency of action to upgrade the quality of economic administration in Afghanistan. This is necessary both in order to increase the capacity to undertake new investment, and to increase the returns from existing projects. The actions which are needed include higher salaries, revised personnel policies and simplified administrative procedures. Related to this, there needs to be a major expansion and inten- sification of administrative training. These actions are needed not because they will have an immediate impact, but to create the basis for a substantial improvement beginning with the next seven-year plan in the early 80s. 10.4> In the past, development activities which have succeeded in Afghanistan have almost invariably required the creation of semi-autonomous agencies, which can to some extent free their staff from the constraints of Government personnel rules and civil service procedures. Foreign donors have pressed for the creation of such agencies in the recognition that the administration could not be relied on to carry out projects efficiently. By and large, this approach has succeeded and such agencies as AgBank,-AFC, HAVA, etc. provide the basis for Afghanistan's development effort. But the success of the semi-autonomous agencies has not been without cost. It has tended to bias the investment program towards projects which are narrowly defined in terms of regions or sub-sectors. This may have delayed the expan- sion of key national programs, particularly those relating to rural develop- ment. The semi-autonomous agencies have removed a progressive element of - 244 - staff from the operating ministries and reduced the pressure on those minis- tries to perform at levels which would be acceptable both to external donors and the local population. 1O.42 What strategy should the Government and external donors adopt in their approach to the improvements in economic administration which are critical to medium and long term growth? The first step must of course be the implementa- tion of the changes referred to in the preceding parts of this chapter. There is welcome evidence of the priority which the Government attaches to these changes in the recent creation of a Department of Civil Administration. The second step must recognize that even if steps are taken, results will only be visible in the longer term. There must therefore be reliance on broad policies to promote efficiency, rather than specific administrative regulations. There must be a conscious effort to minimize the degree of administrative involve- ment in such areas as industrial licensing, fiscal and monetary policy, etc. The third step is to shift away at this point in time from the setting up of new semi-autonomous agencies in fields where the administrative system would normally be expected to operate. This suggests that projects should be specifically geared to working with the administration, to improve basic operations. The work of the Management Services for Health team in the Min- istry of Public Health, provides a model of what can be achieved through a long term association of technical assistance at the Ministry level. This is not to suggest that semi-autonomous agencies are unnecessary. They should certainly be created whenever the public sector enters into trading activi- ties, or in new and highly specialized fields where no competence is available within the ministry concerned. In those sectors where the institutional frame- work is well established however, such as agriculture, where projects involve broad national programs, they should be undertaken through raising the quality of the concerned ministries' own input. B. The Planning Process in Afghanistan 10.43 Formal planning in Afghanistan started with the Development Plan prepared in 1954. The First Five-Year Plan covered the period from March 1957 to March 1962 (1336-1340). The second and the third plans covered the subse- quent five-year periods and the Fourth Five-Year Plan started in March 1972 (1351), but was abandoned after the change of regime in 1973. The present Seven-Year Plan covering the period 1976/77 to 1982/83 was finalized in mid-1976. 10.44 During the 1950s, the Royal Government of Afghanistan decided to seek major foreign assistance for developing the country economically. The first steps for diversified assistance at the national level were initiated by a Technical Assistance Agreement signed with the US Government in 1950. How- ever, the Government was advised that the formulation of a national development plan was a precondition for receiving more economic assistance. As a conse- quence, the planning unit which existed in the Ministry of Finance was assigned the task of preparing Afghanistan's First Five-Year Plan, and a Ministry of Planning was established in 1956 with Prime Minister Daoud himself filling that post. - 245 - 10.45 To help finance the new Plan the USSR offered to Afghanistan a long- term commitment of both military and economic assistance on favorable terms. Using the Soviet loan as a base, the Government prepared the First Five-Year Plan. The drafting was entirely done by the Afghan experts. The Second, Third and Fourth Plans were prepared with the assistance of Russian planners as well as the various other foreign advisers. The present Seven-Year Plan had substantially more input on macro-policies and strategy from Afghan planners than in the past. At present there are four groups of foreign advisers. The USSR team (4 advisers from the Gosplan), an Indian Team (3 experts under the Indian Technical and Economic Cooperation-ITEC Program), and a UN Team of 5 experts. The role of the UN Team has been limited mainly to ad-hoc tasks and some monitoring functions. The USSR Team participated mainly in drafting those aspects of the Plan relating to the Russian aid program. There were as many as 25 Russian experts in the Ministry of Planning at the time of the drafting of the Plan. In addition to these three advisory groups, there is a FRG expert who mainly deals with German assisted projects in Afghanistan. 10.46 An extraordinary amount of technical assistance has been made avail- able to the Ministry of Planning since 1956. Apart from the Soviet teams, American, German and French resident groups were also sent for the purpose of assisting with the preparation of one or other of the Five-Year Plans, to help organize the basic data, set up the preliminary targets and prepare the sec- toral investment programs and the financial balances. Against this background,. the progress made to date in developing an indigenous planning capacity, is somewhat disappointing. The data base remains one of the least reliable for any developing country with few of the national economic aggregates which are the keys to planning at the macro-level. At the sectoral level there is little attempt to put together policies and projects in some integrated fashion. The projects themselves often show evidence of not being carefully thought through by the concerned officials, so that their designs neglect implementation problems, inter-sectoral linkages and some of the social implications of development in the Afghan context. (i) Major Features of the Early Plans 10.47 The first two Plans set up a general order of priorities that em- phasized investment in transport and communication reflecting the importance attached to geographic unification of the country and the end of Afghanistan's isolation. The development of infrastructure was understandably given prior- ity at that stage of the country's development. However, recognizing the urgent needs to achieve more pronounced increases in production, the Third Plan started shifting the emphasis of investment expenditures from long ges- tation infrastructure projects toward more directly productive and higher yielding projects in the agricultural and industrial sectors, financed in part by increased government revenues. The Fourth Plan was similar to the former one in that it placed emphasis on investment in directly productive projects and on its financing by greatly increased government revenues. 10.48 Lack of reliable information renders it difficult to make a precise quantitative appraisal of the economic progress achieved during the Five-Year Plans. However, although the information is of poor quality, it is probably - 246 - not far from the mark to read from it that the increase in national income during the period of planning has been negligible, perhaps three percent per annum, while population increased by about two percent per annum, and also that the rate of implementation of the plans generally turned out to be slower than was forecast. 10.49 The low rate of growth of GDP reflected the bias in the investment programs towards large-scale and long-gestation infrastructure projects, which have not contributed greatly as yet to increases in the level of output and income or to foreign exchange receipts. Despite some beneficial results for the geographical unification of the country and the market orientation of pro- duction, the past plans, as indeed the present Seven-Year Plan, were largely collections of public investment projects often chosen on the basis of avail- ability of assistance from abroad and not in terms of any specific policy objectives of the Government or a well defined strategy of development. The targets in the plans reflected the anticipated results from the completion of those specific projects. In addition, it is probably true that the plans reflected felt needs in a broad sense, for instance, the desire for more irrigation, education or communications, but there was no systematic and quantitative framework for the assessment of priorities between projects within a sector or between sectors. Interdependencies were often not properly quantified leading to over provision of facilities in some sectors e.g. power and under provision in others, e.g. education; or insufficient attention was paid to utilizing existing investments fully and effectively by putting in place the complementary investment (e.g. feeder roads) and other programs designed to stimulate production increases and thus to increase the rate of return of the infrastructure investments. 10.50 The plans were specified in terms of physical targets and did not pay enough attention to policy formulation. Some of the physical targets were reduced to a set of public investment projects. Moreover, development expenditures in the plans related primarily to public sector expenditure with the private sector playing a secondary role. The public investment programs of the plans were not complemented by a framework of policies, e.g. monetary, fiscal, balance of payments or sectoral, for supporting and inducing growth. 10.51 One of the consequences of the concentration on physical targets and large public investment projects essentially based on foreign aid was that the Plans did not pay enough attention to the measures required to develop an in- stitutional framework for the modernization of the economy, for instance, a modern banking and credit system, the development of an accounting profession, a framework of commercial law, etc. In particular, the institutional frame- work for planning and implementation is still at a critical stage of develop- ment despite more than 20 years of planning, and there are not yet sufficient numbers of Afghan officials directing the planning endeavor. In spite of the project orientation of the Plans, very little capability has been developed to undertake sectoral analysis, project identification, project feasibility analy- sis and evaluation, and to develop schedules for implementation, monitoring and control. There are no organized and well staffed planning units in the operating ministries which could coordinate meaningful sectoral plans and programs with the Ministry of Planning as well as ensure that the projects - 247 - selected for implementation by the Ministries reflect sector priorities and are economically sound. As projects included in the Plans often did not have suitable feasibility studies and schedules for implementation, they were often not taken up, while projects not listed in the Plans were carried out if asso- ciated with an offer of assistance. At the project level performance targets were not established, nor were adequate financial controls exercised on state enterprises and other projects. 10.52 The plans were not kept under annual review to take account of pro- gress in implementation and changed domestic and international conditions. There was no serious attempt to institute a short-term annual or biennial planning process to facilitate more effective resource mobilization, alloca- tion and utilization and to provide the basis for annual budgeting. And too, mainly because of the paucity of statistical data, in particular those for population and national accounts, the planners were not able to use a macro- economic planning framework to relate investment and savings to projected growth rates over the successive planning periods. Therefore, the main objec- tives of the plans have been stated in qualitative rather than in quantitative terms. Besides, there are few breakdowns of available statistics into dis- tricts or provinces, rendering comparison between areas or regions of the country impossible. Sectoral targets, however, have been more specific and have referred to physical goals for commodity production. Projections of the level and allocation of government current and development expenditures and their financing have also been included in the Plans. (ii) Planning and Policy-Making Machinery of the Government 10.53 The problems outlined above have logical solutions, and most of them have already been proposed to the Government by many qualified teams of experts who stayed years in the country. The basic weaknesses of the planning process are still the same and they need neither further nor deeper analysis. There exists a wide body of knowledge on national development planning which has been gathered, evaluated, formulated and dispensed through bilateral and international agencies, e.g. USAID, German, French and Indian Assistance and the UN. Although the 1973 revolution has stated ambitious development objectives for the country, the structure and organization of public management has not undergone significant changes in response to these new demands. Whereas the Seven-Year Plan forecasts a total investment program of about-$3.3 billion for the period 1976/77-1982/83, the planning authorities of the central and sectoral ministries still lack an adequate institutional framework as well as qualified manpower, managerial resources and data to carry out such a massive development program. Unfortunately, in two decades of experience the Ministry of Planning has not yet acquired the range of skills necessary for effective planning. The development of sectoral and project planning capacities in the key operating ministries such as agricul- ture and industry, is at an even earlier stage of development. 10.54 A significant step in restoring the confidence, morale and effective- ness of the civil service in Afghanistan would be to improve the arrangement and responsibilities of the ministries and agencies for planning and oversee- ing economic activities. The current organizational structure and division of - 248 - work at the top levels of the Government makes the task of generating effective sectoral programs a very difficult one. This organizational structure also hinders any coordination and implementation activities. The three important instances of this are as follows: (i) division of responsibilities and func- tions between the Ministry of Planning and the Ministry of Finance on policies for resource generation and allocation, based on two separate budgets; (ii) lack of coordination between the Ministry of Planning and the operating minis- tries and agencies on responsibilities for developing sectoral policies and programs, difficulties which have been an indirect but significant contributor to the current slowness on supply of funds and manpower and (iii) lack of an effective high level committee of cabinet responsible for the coordination of all planning and economic policy-making activities as well as evaluation of the implementation of the Plan. 10.55 The Ministry of Planning, through its various departments, is respon- sible for coordinating and implementing the development strategy and economic and social policies of the Government. More especially, it is charged with the responsibility of defining the major socio-economic development objectives of the country, proposing appropriate development policies and preparing and directing the implementation of the approved policies, plans and programs. One of its main tasks is to harmonize the development programs of various ministries and agencies. The responsibility for monitoring and evaluation is vested partly in the Ministry of Planning and partly in the operating minis- tries. The Ministry was not in the past responsible for implementation of development projects, although it issued instructions to the operating min- istries and agencies concerning project implementation. In practice, such instructions were often ignored. The Ministry of Planning, being on the same administrative level as the other operating ministries, could not expect its instructions and directives to be fully carried out by them in all cases, particularly in a society where hierarchy of authority is at the root of all decisions. Control of project implementation became possible through the introduction of a system of quarterly progress reports. The development budget being the responsibility of the Ministry of Planning, release of funds has been tied to the progress of projects, providing a mechanism for monitor- ing performance. 10.56 The Ministry of Planning is headed by a Cabinet Minister. It has at present seven main departments, each headed by a President. These are Planning and Economic Analysis, Technical (and control of Plan implementation), Finance, Private Investments, Technical and Economic cooperation, Training, and Perspec- tive Planning. This last department was created only in late 1977. Contrary to other Ministries, administration is not handled at a department level but at a lower one. This unit is headed by a Director-General. In fact, each of the departments are subdivided into a number of Directorate-Generals and Direc- torates, respectively of ranks 3 and 4. (The President of a Department has a rank 2.) The number of departments has varied since the creation of the Min- istry of Planning. In 1966 the Ministry of Planning had a professional staff of about 97 and a non-professional and administrative complement of about 54. In 1971, 86 professionals were officially registered in the Ministry. In the absence of precise data, the UN team which is currently working in the Ministry has estimated the present professional staff at 50 (in 1977), among a total of 223 registered employees. - 249 - .10.57 The Ministry of Planning suffers from severe understaffing with only these 50 professionals to undertake the huge task of formulation, supervision and control of the Plan. There are numerous vacancies. For more than a year, for instance, of the five divisions of the Planning Department, only two have had Directors-General, while the heads of the three others are studying abroad. Sometimes, despite more than two years in office, some officials with good performance records are not confirmed in their position. These situations obviously create frustration, as does the recurrent problem of salary level. For instance, the quality of some junior professionals at the Ministry is very good and they would be qualified to take over parts of the heavy burden of the senior officials. Unfortunately, the low salaries paid to them (e.g. a Director-General with a Masters's Degree in Economics from a foreign univer- sity is paid around US$70 a month), the limited use that is made of their qualifications, skills and initiatives and their low level of participation in the whole process of training and decision-making, has resulted in low morale. This problem is not of course, confined to the Planning Ministry, but characterizes the entire administration. 10.58 Apart from the poor financial motivation for technicians and gov- ernment officials, probably the major difficulty experienced by the Ministry of Planning in the carrying out of the planning tasks, is the excessive con- centration of decision-making responsibilities with those officials who have the power to enforce the implementation of the selected projects and who have personal knowledge of the relative priorities favored by the Government at that particular time. This situation tends to overburden the few available qualified top officials, while at the same time, limiting the effective use of the decision-making capabilities of junior staff. In general, people of lower rank tend to avoid any controversial recommendations by pre-empting them with requests for instructions from senior officials, no matter whether or not there exists sufficient background material to justify such requests. It is necessary for the staff of the Ministry of Planning to build up the profes- sional competence to influence the plans and programs of the operating Min- istries. This influence needs to be exerted not only in areas related to economic planning, but also in the establishment of the administrative struc- tures and organizational methods which ensure that economic plans are practical and achievable, and can be implemented at reasonable standards of efficiency. For the Ministry of Planning to extend dynamic technical and managerial leader- ship in the entire process of development, it needs, (i) to revise carefully its personnel policies, (ii) to define clearly the tasks and functions to be carried out by its staff and (iii) to define the responsibilities of each operating unit in relation to each other within the structure of the Ministry. 10.59 In matters of effective plan implementation, the need for close coordination between Plan and Budget, and therefore between the Ministry of Planning and the Ministry of Finance cannot be underestimated. Effective plan implementation requires budgetary procedures and a budget classification system which permits appropriate budgetary expenditure controls and easy translation of the plan into budgetary terms, as well as the preparation of timely and accurate reports on plan progress. But the lack of distinction between Development and Ordinary budgets and the way both budgets are classified and prepared do not generate sufficient coordination between the two ministries. - 250 - A limited procedure of budget preparation exists, which links the various steps in the process as follows: (i) budget proposals are prepared by the spending ministries, (ii) these are then scrutinized and consolidated in the Ministry of Finance and the Ministry of Planning, (iii) discussion between the Department of Finance of the Ministry of Planning and the Revenue Department of the Ministry of Finance takes place, to balance the two budgets, (iv) the Da Afghanistan Bank (the central bank) finances budgetary deficits as required, on the recommendation of the Cabinet, and (v) finally formal approval of the National Budget is given by the Cabinet. (The National Assembly will probably have to approve the Budget in future). However, apart from the dis- cussions which occur between the two ministries during the preparation of the National Budget, the staff of the two Ministries seldom work together.. The Ministry of Planning and the Ministry of Finance prepare separate estimates of resources which can vary significantly, necessitating endless subsequent adjustments. It must be underlined once again that there is a need to define the two budgets more clearly by separating development from non-development items on current as well as capital accounts. Although there exists a time schedule for budget preparation, the two budgets are not systematically prepared, coordinated and consolidated at a higher ministerial level in order to produce a meaningful instrument of programming and control of development plan activities. 10.60 Broadly speaking, responsibility for the identification and the pre- liminary formulation of development projects has been alloted to the Operating Ministries, and in particular to the Planning Departments in such ministries. The formulation of a development project, and the conduct of any necessary feasibility study are carried out by the sector Ministry, occasionally in cooperation with the Ministry of Planning, if technical skills are available. When projects involve external financing, a detailed feasibility study is generally handled by the financing agency or the foreign consultant and appraised by the Ministry of Planning. Responsibility for the implementa- tion of development projects rests with the Operating Ministries while opera- tional monitoring and supervision is the responsibility of the Ministry of Planning. The review of the machinery for preparing projects and sector programs has been a subject of much comment. However, practically nothing has been done in the past five years to improve significantly the sector programming and the quality of projects for external financing. 10.61 Most of the planning units in sector ministries are not yet able to organize and coordinate the preparation of well-conceived projects and programs in a reasonable period of time. Such important ministries as Agriculture and Industry do not yet have efficient and well organized planning units. UNDP is providing technical assistance for upgrading the planning capability in these ministries. In general, planning units are severely understaffed and also lack authority because they are located at a level too low to be effective (the departmental level). Most of them do not seem to have a proper apprecia- tion of their role in their respective organizations with the result that they are performing routine functions far removed from proper planning. The tech- niques of sound project preparation are at an embryonic stage and the pro- gramming work usually takes the form of listing projects financed or to be financed by foreign donors. And too, the separation of the Planning Department - 251 - from the Administration Department within each Ministry which is concerned with the preparation of the Ordinary Budget for the Ministry, often results in investment programs being prepared without sufficient attention being given to the likely effect of these investments on recurrent expenditures. 10.62 Finally, the highest economic policy and coordinating authority is vested with the Supreme Economic Council, previously known as the High Eco- nomic Council which was established in 1957. At present, this Council is not operational and only an Economic Board, which consists of a small group of top officials and economists, performs some advisory functions to the Cabinet. Prior to 1973, the Supreme Economic Council was chaired by the Prime Minister and included the Deputy Prime Minister, the Ministers of Finance, Commerce, Planning, Agriculture and Irrigation, Mines and Industries. Before 1971, the Council included several other members (both officials and non-officials) some of whom acted in their personal capacity. No Secretary was ever assigned to the Council. The Secretariat function was once vested in the office of the Prime Minister, whereas the Ministry of Planning was designated by the Council to perform staff functions. However, the Ministry of Planning did not release any personnel for this purpose and did not perform the proposed staff functions because of the severe shortage of its own staff and probably also because of a natural reluctance of one ministry to make its staff available to another gov- ernment entity where it might lose control of those staff members. The Supreme Economic Council has not yet fulfilled its function as an effective instrument for the coordination of development policies. First, the responsibilities were diluted amongst too many members to be effective, increasing the potential antagonisms and consequently lessening the credibility and power of the Council itself. Second, the Ministry of Planning failed or was not able to provide adequate support to the Council in terms of studies or policy recommendations based on a well conceived strategy for development. And, third, there was no time scheduled for meetings and no effective follow-up on those Council recom- mendations that were finally formulated. As a principal deficiency in the Afghan planning process is the lack of adequate procedures to implement the Plan, it is absolutely necessary that firm action is taken to strengthen this top policy-making government body so as to ensure its role in inter-ministerial coordination, evaluation and control. (iii) The Planning Process 10.63 The concept of planning as a continuous process is not sufficiently appreciated in Afghanistan. Planning is regarded as a little more than the act of preparing a multi-year document called a plan, and has become an end in itself rather than a means to achieving development. The Plan is usually not operationally oriented, and little effort is made to implement it. A Plan which is merely a collection of foreign financed projects not aggregated into a coherent sectoral and macro-economic framework cannot become an effective tool of development. Planning should be regarded as a living process., flexi- ble and responsive to changes. - 252 (a) Plan Preparation 10.64 Economic and policy studies: A weakness of the Plan is the impre- cise definition of objectives and policies to carry them through. The devel- opment strategy needs to be spelled out more "operationally". Although the full range of data required is still not available, there is enough information in Afghanistan to sharpen the definition of objectives and to quantify them. One way to achieve this would be to undertake economic and policy studies, both macro-economic and sectoral. The studies would have five major purposes: (i) to review the past year's performance and to compare the stated objectives with the actual results; (ii) to develop a better understanding of recent developments in aggregate output, sectoral trends, prices, public finance, the monetary situation, external assistance, balance of payments and debt service; (iii) to look at major economic issues which arise and to provide a focus for review of the incentive system, price policy, exchange rate policy, etc; (iv) to develop methodologies and fill the gap in basic national and sectoral surveys essential to planning, such as studies on distribution of income, surveys on manpower and employment, etc., and (v) to provide support for the preparation of an Annual Plan and the national Budget and to develop methods for overall economic forecasting. 10.65 The analysis and studies will provide the necessary groundwork for economic and policy dialogues between the ministries and government agencies, as well as for the design of foreign assistance programs and aid coordination among donors. Macro-economic studies should be carried out by the Planning and Economic Analysis Department of the Ministry of Planning and an Economic Analysis and Projections Unit should be created in the Department. This unit should be in charge of drafting an annual economic survey; special studies could also be undertaken by this unit. Sectoral studies should be carried out by a new department which could be called Sectoral Analysis and Coordination and Regional Development, the coordination and integration functions being carried out by the two units, Sectors and Regions, in their respective fields. 10.66 Sectoral Planning and Project Planning: the Operating Ministries are primarily responsible for identifying and preparing projects within, of course, the framework of the Government's macro and sector strategies and policies. However, as a consequence of the weak project identification and preparation capability in the ministries and government agencies, development loans offered to Afghanistan often remain uncommitted to particular projects for considerable periods of time. So far, local capability has not developed to a sufficient extent and there are warning signals that external dependence may become self perpetuating. It is, therefore, clearly in the national interest to improve, as a matter of urgency, the project identification/ preparation capability of the operating ministries and agencies. 10.67 Most operating ministries have planning units but these are often extremely ineffective in performing their function. This is because there is a failure to understand that each department within a ministry must do its own planning, and that the planning department's job is to co-ordinate these efforts. Planning for forestry for example must be done in the Ministry of - 253 - Agriculture by the Department of Forestry and not by the Department of Plan- ning. This failure to recognize that planning cannot be divorced from opera- tions and that the role of formal planning departments and ministries is to harmonize the efforts of the individual operating departments and minis- tries, is at the root of many of the deficiencies in planning in Afghanistan at present. 10.68 Planning and Budgeting: It is important to recognize that planning means much more than preparing a plan: it should be understood as a system of decision-making which requires a mechanism for adapting the plan to unexpected developments. This can be best achieved by an Annual Plan. Afghanistan has had an Annual Plan for a number of years, but it does not fill this role as yet. It is a compilation of the development budget and forecasts of physical progress. The Annual Plan should become an inventory of needed action and a policy instrument for regulating both the public and private sectors. It should, (i) project the growth of the economy over the next year, (ii) iden- tify the principal tasks and problems ahead (including those outstanding from the preceding year and likely to continue from the current year), and (iii) formulate the appropriate financial policies and programs for that year in a systematic coordinated manner; the Annual Plan provides a much-needed mechanism for a systematic review of the economic situation which is a prerequisite for devising sound fiscal and monetary policies to be reflected in the Budget. 10.69 The Plan is essentially a blue-print for allocation of public sector funds for capital projects and development programs. It is the Budget which is the principle instrument for implementing the Plan. The planning and budgeting functions in Afghanistan must be better coordinated. It is essen- tial, first, that the Annual Plan be based on a comprehensive budget which will show the interrelationships between the two present budgets and, second, that the budgetary schedule be integrated with that for the preparation of the Annual Plan. Planners and budget-makers must establish close working relation- ships through committee meetings. It is, therefore, necessary to snychronize the procedures and timetables for Budget and Annual Plan formulation and approval. 10.70 Regional Development: One of the key issues in Afghanistan's admin- istration and economic management is the question of how to make regional and rural development activities more effective. An indispensible element of this is to decentralize the administration and to broaden the base of participation in the development process. More people must be concerned with the programs and projects which are implemented in their region. The Plan must be under- stood by the population to be effective. At present, the machinery for plan implementation is highly centralized though, in some cases, the provincial governors play a role in the process. The preparation of comprehensive regional development plans would at this stage be premature, since in most cases the data base for this sort of comprehensive plan is lacking. However, Afghanistan has undertaken regional development programs in the Helmand Valley area, in Paktia, Konar and Badakhshan. This experience should be pursued more systematically. The country should be divided into four or five major regions with planning offices, and the present Sectoral and Regional Development Coordination Directorate in the Ministry of Planning should be upgraded. It - 254 - was the intention of the Ministry of Planning to create four regional planning offices, in Herat, Kandahar, Mazar-i-Sharif and Konar. Unfortunately this pro- posal is now dormant. We would urge that it be revived, with the addition of a fifth office, to cover the central region, in Bamian. 10.71 In the first stage, these offices could have the task of collecting statistics in cooperation with the CSO, centralizing all kinds of socio- economic information and promoting coordination between provincial offices and government agencies in their respective region. If decentralization of the decision-making process is to become a reality, the Provincial Development Department, which was created at the local level in 1959, but proved ineffec- tive and was discontinued after 1974, should be reactivated and strengthened with qualified personnel. In addition the Provincial Council should become a more responsible and active body in the articulation of felt needs and the implementation of projects. Decentralization of decisions and coordination of activities at regional and provincial levels are essential elements in the development process. At a later stage of the development.of the country, the Planning offices should become the centers of administrative regions based on considerations of ecology and resource potential. (b) Plan Implementation 10.72 Implementation of development programs and projects has been one of the major bottlenecks of the planning process in Afghanistan. Responsibility for implementation rests primarily with the operating ministries while the Ministry of Planning acts as a watchdog. The Ministry of Planning exercises control over the disbursement of allocated funds for each project as a means of directing their implementation. In practice, the Ministry of Planning does not possess the technical expertise with which to judge the claims or proposals of the technical ministries and authorities or to analyze the delays in implementing projects. The Planning Ministry is unable to respond quickly to situations where projects are encountering difficulties and where appro- priate action should be taken by the Ministry concerned. Moreover, the irregular and sometimes inadequate flow of local currency funds, authorized by the Ministry of Planning and released by the Ministry of Finance to the development agencies, has caused a slowing down of many development projects. Although there is currently a system of quarterly reports on development expenditure submitted by the operating ministries to the Ministry of Planning, they are not sufficiently timely (the delays are sometimes of the order of six months), comprehensive or accurate. An effective reporting system on projects is required providing detailed information on the financial and physical progress of implementation. 10.73 The responsibility for effective implementation of projects should rest with the Operating Ministries. The quarterly release of funds through the Ministry of Planning creates delays in project implementation process, and introduces diseconomies into ministerial work programs. The approach seems to presuppose irresponsibility in the technical ministries. The technical min- istries are the best judge of the progress of their programs and projects. They should, therefore, be given the responsibility and capability to evaluate, monitor and control their own projects both in physical and financial terms. - 255 - More particularly, the technical ministries should be responsible for (i) receiving and reviewing the regular progress reports submitted by agencies and authorizing release of funds within the limit of the amount alloted by the Ministry of Planning, (ii) monitoring projects and drawing attention to prob- lems which have arisen in implementation, (iii) alerting the Ministry of Planning to bottlenecks and shortfalls, and (iv) making proposals for dealing with them, in collaboration with the Ministry of Planning. The function of the Ministry of Planning should be confined to overall coordination and con- trol through a careful review and discussion of progress reports submitted by the technical ministries. The Ministry of Planning should release funds to the Ministries every six months instead of every three, but should keep its own monitoring and control system of the rate of implementation of particular projects. It should also carry out ex-post evaluation of completed develop- ment projects. 10.74 Training, Manuals and Research and Reports: At present, Afghan officials are largely trained abroad in universities and educational institu- tions which offer diplomas/degrees and short-term courses. A program to develop skills in planning and the management of development projects cannot depend for too long on foreign academic training. The objective should be to see that before the end of the Seven-Year Plan, Kabul University and other train- ing institutions develop a curriculum and training methods for post-graduate courses in economics and other subjects vital to the economic development of the country. Meanwhile, however, an alternative solution is to develop short and medium-term courses for high level executives and middle-level managers. It is important to train officials at the higher levels to (i) utilize the skills and tools of modern management during the course of their work, (ii) relate their decisions to national development goals, and (iii) delegate their authority and employ better the abilities of their subordinate staff. For middle management, the need is greatest in the planning, organizing and, in particular, the control of individual development projects and programs. 10.75 Probably the most important step in the field of training is the proposed creation of a National Institute for Planning and Administration with- in the establishment of a National Administrative Reform Centre, based on the recommendations of the 1976 High Commission on Administrative Reform. The project to create the Institute got underway with UNDP assistance, in late 1977. The National Institute training program will be primarily oriented towards the senior managerial level with courses covering: Development Man- agement, and Management Systems and Dynamics (including such courses as the Management Process and Decision-Making; Delegation of Responsibility; Planning and Control; and Project Evaluation). Other training, addressed more to mid- dle management, will include more technical and managerial courses/seminars such as: Planning and Project Administration, Advanced Seminar on Planning Techniques, Workshop on Accounting and Auditing Practices, etc. The program proposed seems sound and good results are expected from its implementation. 10.76 The search for methods to improve the efficiency and effectiveness of government administration at provincial and district levels merits careful attention. One of the ways of strengthening these capabilities is to draft a kind of Planning Manual for use at the provincial and district levels which - 256 - would provide simple procedures or guidelines to (i) collect and generate socio-economic data, (ii) prepare simple feasibility studies, (iii) draw up development programs for the province, including the selection of projects and investment allocations by sector, (iv) supervise and coordinate the imple- mentation of the programs and projects and report progress to the respective agencies, (v) oversee the effective operation and maintenance of projects executed, and (vi) evaluate progress accomplished against plan objectives. It is also important to introduce a simple methodology for programming and budgeting along with supporting procedures, particularly cost accounting. 10.77 Research must not be neglected in the development process, partic- ularly due to the very low absorptive capacity of the country. Technological transfer -'in its broad sense - is at the root of all problems encountered in the implementation process in Afghanistan. It needs to be studied deeply in all its aspects, including the cultural, sociological and anthropological. It is impossible to introduce new technologies if people do not accept them and are unable to use them. A selection of projects should be studied carefully from the village or district where it has been executed to the ministerial level. Although major obstacles which have been analyzed throughout this Report, are known and have their solutions, many other problems are roooted in traditional behavior patterns. The University has to be involved progressively in the development of the country by contributing to such research. A further benefit of this participation might be to acquaint teachers and students with development problems which they may face as future administrators. - 257 - XI. DOMESTIC RESOURCES A. Public Finance 11.01 The Afghan fiscal system differs in several basic respects from those of most countries. First and foremost is the extremely small size of government revenues. The tax to GNP ratio, although recently increasing very rapidly, is less than 7 percent. This ratio is nearly the lowest in the world. As shown in Table 51, the average tax to GNP ratio of developing countries was 15 percent in 1971. Table 51: SELECTED DEVELOPING COUNTRIES RATIO OF TAXES TO GNP (in percent) (1) 1969/71 Taxes/GNP Pakistan /a 12.0 India 13.4 Iran 21.6 Turkey 15.6 M-Iorocco 17.8 Sri Lanka 17.7 Nepal 04.0 Afghanistan /b 07.1 Mean (47 countries) 15.1 /a 1972/73. /b 1975/76. Sources: (1) Chelliah, Raja J., et al, "Tax Ratios and Tax Effort in Developing Countries, 1969-71," IMF Staff Papers, Vol. XXII, No. 1, March 1975. (2) World Bank, World Bank Tables 1976, (Johns Hopkins, 1976) passim. Afghanistan data, Research Department of DAB. Even if we use total domestic revenues (i.e. both tax and non-tax) as the numerator, the ratio to GNP remains low, less than 12 percent, again putting Afghanistan in the lowest quintile of developing countries for this ratio. Second, Afghanistan relies to an extreme degree on foreign resources to fund the development program. Over 1972/73 - 1976/77, 45 percent of the develop- ment budget was financed by foreign aid. Actually this was a period of very low foreign participation. From the trough of 1974/75 the foreign financial portion has been returning to historical levels, and by 1976/77 it was back to - 258 - 72 percent. 1/ This is in strong contrast to the developing countries as a whole, where national resources account for over 85 percent of gross invest- ment. 2/ Third, taxes on foreign trade as a proportion of total tax revenues are extremely high compared to other countries. They were 71 percent in 1972/73, increasing to 78 percent in 1975/76. In contrast, the IMF study of 47 developing countries (see Table 52) has the average proportion of foreign trade taxes to total taxes at 32 percent. Table 52: COMPOSITION OF TAX REVENUE, AFGHANISTAN 1975/76 AND DEVELOPING COUNTRIES, 1969-71 (in percent of total taxes) Taxes on Poll and Production Income Taxes on Personal Foreign and Internal Other Taxes Property Taxes Trade Transactions Taxes Afghanistan 15.9 1.4 - 78.1 4.3 0.3 Other Countries 27.3 4.9 1.4 32.1 31.9 2.4 Sources: (1) Afghan data derived from Volume II, Table 5.2. (2) Chelliah, Raja op. cit. (see Table 51). The Afghan ratio is even more anomalous when we note that a relatively small share of GNP in Afghanistan enters into foreign trade. In 1975/76, exports were 16 percent of GDP, while in a 22 country random sample of developing countries the mean export share of GDP was 29 percent. Only Turkey had a share of less than 10 percent. 3/ Fourth, because publicly owned natural gas exports account for such a large share of government resources, non-tax domestic revenues are high compared to most countries. In this respect Afghanistan is similar to other mineral exporters. 4/ Finally, Afghanistan is extremely centralized administratively. The provinces have no tax authority and no budgets. All resources transferred to the provinces do so via the central government budget. Only the 87 administrative units classified as municipalities have independent tax bases. But their total resources are very meager, less than 1 percent of GNP in 1976/77 (see Volume II, Table 5.9). 1/ Notwithstanding extremely high foreign aid relative to total development expenditure, Afghanistan's per capita foreign aid receipts have been close to the average for all developing countries. In brief, foreign aid is not so high but domestic resources are very low. 2/ By definition gross investment includes both public and private compo- nents. There is every indication that private investment in Afghanistan is extremely low. 3/ Even if we increase the ratio very liberally because of failure to include smuggled exports, this conclusion holds. 4/ As discussed in Volume II some of this difference, is due to peculiarities of public accounting in Afghanistan. - 259 - 11.02 In general terms, the reasons for the very low level of taxation are clear. Afghanistan's tax administration, like those of all central governments, depends almost exclusively on monetized tax bases. However, subsistence production accounts for as much as a quarter of Afghan GNP. Such production is largely beyond the grasp of the tax collector. Further, smuggling is a major Afghan economic sector. In recent years, at times, it may have accounted for as much as half of that trade which moved through legal channels. More importantly the quantity and variety of goods smuggled is very responsive to opportunities for profit. In the past decade, on sev- eral occassions the Afghan tax authorities raised certain import and export duties to the point where the actual increase in revenues was far below the expected increase, due to the resulting shift of trade into smuggling. In addition, a very underdeveloped public administration, and the primitive accounting practices of private firms and households have meant great dif- ficulty in effectively utilizing such tax bases as retail sales, corporate incomes, gross receipts of manufacturers and so forth. 11.03 These very qualities of rudimentary public administration and a great deal of income in agriculture and small rural activities are also the major reasons why countries in the early stages of development rely heavily on foreign trade as the major tax base (although very rarely to the degree of Afghanistan). Finance ministries of developing countries first and foremost collect taxes where it is administratively and politically feasible to do so. Foreign trade meets both feasibility criteria very well. 11.04 The reason for the unusually high share of non-tax domestic revenues is the very low level of taxes coupled with substantial sales of natural gas to the Soviet Union. In 1976/77 these accounted for 20 percent of domestic revenues. Were such sales eliminated, non-tax revenues as a share of total revenues would decline to an un-remarkable level. (i) Revenue 1972/73 to the Present 11.05 In real terms, tax revenues slightly more than doubled from 1972/73 to 1976/77. This is dramatically reflected in Table 53 where the ratio of taxes to GNP is seen to nearly double over the same 4 years. - 260 - Table 53: GOVERNMENT ACCOUNT AGGREGATES AS PERCENT OF GNP, 1972/73 - 1976/77 1972/73 1975/76 1976/77 /a Taxes 3.7 6.2 6.9 Domestic Revenue 6.7 10.4 11.1 Ordinary Expenditure 5.8 7.7 8.3 Ordinary Surplus 0.9 2.7 2.8 Total Expenditure 10.8 13.3 18.3 Central Bank Borrowing 0.04 -0.75 3.3 Net Foreign Aid 3.1 3.4 3.8 Balancing Item /b .96 .25 - GNP (billions of Afs.) 85.60 108.77 .115.33 /a Projection. /b Adjustment of public acounts to a cash basis and statis- tical discrepancy. Source: See Volume II, Table 5.5. The reasons for this are near at hand. Over the twelve years 1960/72, the economy grew, albeit slowly, while tax collections grew even more slowly: real GNP increased about 30%, real taxes about 20%. Foreign trade increased approximately pari passu with GNP. Consequently, by the end of 1972/73 the existing tax bases were being less effectively administered than 12 years earlier. One reason for this was the failure to increase specific duties on imports in step with inflation. 11.06 Following the change of government in 1973, there were substantial improvements in tax administration. Actual assessments were brought closer to what the laws required. For example, there was a large increase in the number of individuals and merchants who began to pay income tax. There were also substantial changes in existing laws. The "fixed duty", a flat charge on all dutiable imports, was increased from 4 to 6 percent. Many other import duties were increased. In 1974 the "selective export tax" was intro- duced on cotton, oil seeds, raisins and walnuts, to tax away some of the windfall profits of the sharp jump in prices of that year. As a consequence there was a leap in tax collections in 1974/75 of 42 percent in real terms, and lower increases in succeeding years. 11.07 Although the revenues of all major types of taxes increased sub- stantially, taxes on income and domestically produced and consumed outputs increased somewhat more rapidly than foreign trade taxes. The latter de- clined from 71 percent of the total to just under 69 percent in the 4 year period. In the next year or two it is likely that this trend will persist, if the effort of the Ministry of Finance to increase revenues from the land tax are successful. In 1976, the land tax was substantially revised with the rates much increased and made highly progressive with size of holding. - 261 - (For details see paras. 4.105-4.109 and the description of the tax system in Volume II.) However, until recently, enforcement has lagged. The actual assessment is over Af 500 million, more than three times actual collections in 1976/77. 11.08 A second tax which may increase substantially in the future, and has recently been increasing very rapidly, although starting from a very low base, is that on the income of state enterprises. Income taxes of state enterprises have been as follows: 1974/75 1975/76 1976/77 (Af million) 55 193 331 % of total taxes 0.8 2.9 4.2 This reflects the increasing government effort to reverse the poor revenue performance of the state enterprises. (Nevertheless actual collections in 1976/77 were far below the budget magnitude.) 11.09 As noted earlier, Afghanistan relies heavily on non-tax domestic resources. (They were 44 percent of the total in 1972/73, falling to 38 percent in 1976/77.) The persistence of this situation in the last four years, notwithstanding the very rapid increase in tax revenues, is due to the even more rapid increase in receipts from sales of natural gas. About 95 percent of all gas produced is sold to-the Soviet Union and the proceeds service Afghanistan's debt with the U.S.S.R. Current policy is to conserve this resource, and its proportional share in total revenues is expected to decline. 11.10 In spite of the very low level of resources mobilized, Afghanistan had a surplus on the ordinary budget in each year of the four-year period. As Table 53 suggests, insofar as there is any trend in this surplus, it is an increasing one. What is not clear is the extent to which items in the devel- opment budget might equally be included in ordinary expenditures. Normally a development budget includes only activities which hitherto have not existed. Thus ongoing outlays for education or agricultural development would be ex- cluded even though these may result in very substantial growth. In contrast Afghanistan's development budget includes substantial expenditure for mainten- ance, e.g., highways, buildings repairs, and even certain recurrent expendi- tures; e.g. the agricultural extension service. Notwithstanding these stric- tures, a brief review of the Development Budget suggested that well over 80 percent of the items are unambiguously developmental expenditure. A more restrictive definition of development expenditure would still leave an ordinary surplus in each of the four years. This is remarkable since as noted, total domestic resources are extraordinarily short. The conclusion is that thus far the government sector, defined as that part of the public sector whose produc- tion is outside of market channels (defense, administration, education, public health, etcetera), is very small indeed relative to the needs of a country at Afghanistan's stage of development. - 262 - (ii) Expenditures 1972/73 to the Present 11.11 On turning to ordinary expenditures, the small size of the govern- ment sector is also apparent. A basic element in keeping down ordinary expenditure has been salary policy. As noted in paragraph 10.15 between 1964 and 1976 notwithstanding substantial inflation, the wage scales of government workers remained unchanged. Even with the increase in salaries in 1977, aver- age government salaries were less than one half the levels of the 1960s. The structure of ordinary expenditures is shown in Table 54 below. Table 54: DISTRIBUTION OF GOVERNMENT EXPENDITURES (in percentages) Budget 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 TOTAL ORDINARY 53.2 59.6 54.9 58.0 45.5 32.6 A. Overhead Expenditure 31.5 34.2 31.5 26.1 19.3 16.3 Gen. Admin. and Public Order 8.6 9.7 8.6 7.6 6.0 4.9 Defense 15.8 17.0 15.6 14.7 10.4 9.1 Public Debt (interest) 7.1 7.5 7.3 3.8 2.9 2.3 B. Social Services 13.3 15.5 13.9 10.9 9.3 8.1 Education 10.5 11.9 10.9 8.6 7.4 6.2 Health 2.0 2.1 2.0 1.9 1.6 1.2 Other 0.8 1.5 1.0 0.4 0.3 0.7 C. Identified Subsidies - - - 9.1 3.1 2.3 Foreign Exchange - - - 2.3 1.8 1.3 Government Monopolies - - - 5.4 0.4 0.1 Wheat for civil servants - - - 1.4 /a 0.9 /a 0.9 D. Pensions, Economic Services and Other - - - 11.9 13.8 5.8 Transfer to Pension Dept. - - - 2.1 /a 1.4 /a 1.0 Economic Services, Other - - - 9.8 12.4 /b 4.8 C + D 8.4 9.9 9.5 21.0 16.9 8.2 TOTAL DEVELOPMENT 46.8 40.4 45.1 42.0 54.5 67.4 GRAND TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 GRAND TOTAL AS % OF GNP 10.8 9.5 9.9 13.3 18.3 n.a. Note: The data presented above differ from the official budgetary accounts. The adjustments are explained in detail in Vol. II, pp. 117-120. /a Budget data. /b Of which 24 percent is the amount budgeted for salary increases plus a l1rge sum to compensate bank shareholders following nationalization. Source: Ministry of Finance. - 263 - 11.12 In Table 54 the largest'category is overhead expenditure, that is expenditures not directly benefitting households but which are necessary if there is to be a central government to provide security and foster moderni- zation. They accounted for nearly 60 percent of total ordinary expenditure in 1972/73 - 1974/75 and varied between 42 percent and 50 percent in the three succeeding years. This is very high compared with other countries. Social services, particularly education,, are the second largest category. Their rate'of growth is above that of ordinary expenditures as a whole, and they nearly double over the 5-year period of the Table. Yet at the end of the period they continue very low. Education expenditure in 1976/77 accounts for 1.4% of GNP, less than half the average for developing countries as a whole. 11.13 As discussed, in Volume II, because of the way the Government pre- sents its accounts, there is difficulty in identifying subsidies. However, in Table 54 an attempt has been made to identify some for the period from 1975 to 1978. Two of these, one for purchases of foreign exchange and the other to subsidize prices of government monopolies, are discussed in the section on sub- sidies. The third, namely provision of subsidized wheat for civil servants, can also be seen as a fringe benefit of government employment and probably should be viewed as a form of salary. After considering these three catego- ries there remains the annual transfer (Af 300 million) to the Pension Department to meet the costs of pensions for civil servants and all other expenditures, namely economic services and various unidentified subsidies to enterprises. The concealment of a large and growing subsidy bill within the expenditure figures is a major weakness in-the presentation of Government accounts in Afghanistan, and inhibits effective action to control the growth of subsidies or redirect expenditures to other objectives. 11.14 Table 54 also presents the annual totals for development expenditure. In 1972/73 they were 47 percent of total expenditure. Following 1974/75 they increased very rapidly, in large degree because of the increase in foreign aid, which equaled 53 percent of total expenditure by 1976/77 - notwithstand- ing a more than threefold increase in total expenditure over the period. 11.15 Even with this very rapid increase, in 1976/77 total investment in Afghanistan relative to GNP was low. In that year public development expendi- ture was 10 percent of GNP. Given the very depressed state of the private manufacturing sector it is likely that private investment was extremely low. When we reduce gross investment, public and private, by depreciation, esti- mated at anywhere from 2 to 6 percent of GNP, it is likely that we end with aggregate net investment of less than 12 percent of GNP. Such a low invest- ment ratio will not sustain a rapid growth of GNP of say over 4 percent annually. However given Afghanistan's proverbial and extremely serious problem with effectively using the development resources it already commands, emphasis on increasing the investment ratio could be shortsighted. It may be wiser to channel far more expenditure into basic services with high iecurrent cost components such as preventive medical programs and primary education. In long run perspective such "investments" could be more productive than - 264 - the average project in the development budget. Moreover in these sectors an institutional framework already exists, so that expansion should be relatively facile. The problem with absorptive capacity which so constrains expansion of the development budget may be less formidable in the case of these services. (iii) Seven-Year Plan Projections of Revenue and Ordinary Expenditure 11.16 Table 55 presents the projected domestic revenues and ordinary expenditures over the course of the Seven-Year Plan. - 265 - Table 55: PROJECTIONS OF DOMESTIC REVENUE AND ORDINARY EXPENDITURE FIRST SEVEN-YEAR PLAN 1976/77 - 1982/83 (values in millions of Afghanis of 1975/76) Total Projected Total Estimated Annual rate Estimated in Plan for of Growth in Plan 1976/77 Through 1982/83 for 1982/83 (percent) REVENUES Total Domestic Revenue 13,684 9.7 23,902 Direct taxes 2,144 10.1 3,826 Indirect taxes 5,732 9.7 9,969 Revenue from vehicle licenses 381 7.0 568 Revenue from government monopolies, trading companies, enterprises 5,427 9.8 9,539 EXPENDITURES Total Ordinary Expenditure 11,170 5.9 15,770 Overhead Expenditure 5,001 9.9 7,888 General administration and public order 1,131 3.2 1,369 Defense 2,500 9.2 4,249 Public debt (int./amortization) 1,370 8.8 2,270 Education and Health 1,822 10.2 3,266 Education 1,549 10.6 2,829 Health 273 8.2 437 Government Employee Benefits 508 9.8 892 Pension fund 300 11.7 584 Wheat subsidy 200 6.6 294 Medical benefits 8 9.8 14 Economic Services Subsidies, Other 3,839 -0.4 3,724 Sugar and petroleum subsidy 1,000 - 1,000 Subsidy on Karakul 700 9.4 1,200 Economic services, other 2,139 -5.5 1,524 Current account surplus 2,514 21.6 8,132 Source: Derived from Seven-Year Plan Vol. II, pp. 1-13. After 1976/77 total domestic revenues are projected to grow at 9.7 percent annually with both taxes and other domestic revenues growing at about the same rate. This implies a doubling in the size of the government sector in - 266 - 8 years, an ambitious goal. However the Government did succeed in increasing real taxes at about 18 percent annually from 1972/73 through 1976/77, a good omen for future efforts. Moreover were both taxes and GNP to grow as foreseen in the Plan - the Plan projects the latter's growth at 6.3 percent annually - the tax to GNP ratio would increase from 6.9 percent (1976/77) to 8.3 percent, still a low ratio. However this is misleading given the very substantial share of non-marketed output. Assuming non-market production at 25 percent of GNP, the tax/GNP ratio for the market economy - virtually the only economy taxed - rises to 11.2 percent, a more "respectable" ratio. The marginal rate of taxation implied by the projection is also respectable: 15.7 percent of the increase in monetized GNP would be withdrawn as increased taxes. 1/ On the face of it, therefore, the tax projections appear ambitious but not unreason- able. The discussion below on future taxation also supports this view. 11.17 When the focus turns to non-tax domestic revenues, we lose a good deal of clarity because of the very large degree to which the activities of public entities selling products enter the table on a gross basis (costs are entered as expenditures and receipts as revenues). (The resulting errors are discussed in Volume II). Nevertheless, the projection of growth of non-tax revenues may be warranted. There is a single, although basic, caveat: Forty- two percent of non-tax domestic revenues are projected as transfers of income - after taxes - from state enterprises (Afghan revenues code number 600). It is noteworthy that in 1976/77 as usual the largest shortfall of revenue was that of the state enterprises. Actual receipts from the enterprises were less than a quarter of the amount budgeted. This reflects a problem which has been receiving increasing attention under the Republican Government; namely, how to increase revenues from the state enterprises. In 1976/77 the revenue targets foreseen in the Plan have been largely met because taxes and natural gas sales have increased substantially more than projected. 2/ It is unlikely that such fortuitous compensatory flows will persist in the remaining 6 years of the Plan. Hence there is some doubt that the revenue targets will be met because of the large share therein of state enterprise transfers. Afghanistan is not alone with this problem. In most developing countries, state enterprises rou- tinely suffer losses. It will require an extraordinary effort if Afghanistan's experience is to difEer from the usual one of substantial fiscal drain by such entities. 11.18 Perhaps the most extraordinary projection in Table 55 is that of the current account surplus (CAS). Over the 6 years it is expected to increase more than threefold to Af 8.1 billion in 1982/83. However, the CAS has been quite substantial in earlier years; e.g., it is estimated at Af 3.2 billion in 1976/77, an amount far above that foreseen in the Plan. The Republican govern- ment has hitherto been very successful in keeping a tight rein on ordinary 1/ Calculation presumes equal rates of growth of both monetized and subsistence sectors. A more realistic assumption of faster growth in the monetized sector would only strengthen the argument. 2/ Receipts from the latter increased because of increased prices. Volume was close to the previous year. - 267 - expenditure. It may be able to continue such discipline in the future. How- ever as discussed above, it is not altogether clear that such an outcome would be optimal. More adequate provision of certain social services, even at the cost of development expenditure might be a pteferable outcome. 11.19 In Table 55, on the expenditure side, the leading category, is educa- tion and health, with slightly above average projected rates of growth. Until we get to the catchall category (economic services, subsidies, other) the lagging category is general administration and public order which are pro- jected to grow at about 3 percent annually. Defense in contrast should grow at just under the average rate. There is a similar result as concerns the various benefits for government employees (9.8 percent). However, in func- tional perspective this latter category can be misleading. The benefits are actually a form of compensation for government employees and should be re- shuffled into the various functional categories depending on their weights for government salaries. The catchall category is actually projected to contract. This includes transportation, agriculture, commerce, public works, communication and so forth. However as noted certain expenditures of these ministries which would normally be included in the ordinary budget are carried in the development budget. Thus their contraction here, does not necessarily imply their contraction in reality. 11.20 In the preceding chapter the argument was made that present salaries of Government officials are too low in the view of the World Bank to provide the motivation which the civil service needs. In Chapter XIII we present specific proposals for a rationalization of salaries of Government workers which would add roughly 25 percent to the current bill for this item. This would be additional to any real increases projected for the Plan period in Table 55. In 1976/77 total expenditure (ordinary budget) for wages and salaries was Af 3,265 million or 34 percent of total ordinary expenditure. (See Volume II, Table 5.3). Hence an increase in wages of a quarter will result in additional expenditure of Af 800 million or the equivalent of slightly more than 10 percent of total taxes in 1976/77. 1/ This would be underestimated to the extent that salaries figure in the development budget. A larger increase in pension contributions (Af 30 million) would also be needed so that a total of Af 900 million should be fairly close to the mark. This would be partially offset by the elimination of the wheat subsidy to civil servants (Af 200 million) and the balance could easily be covered by the adoption of the measures proposed below. (iv) Future Taxation 11.21 The Government of Afghanistan has taxed almost exclusively for a single purpose: to raise revenue. The issues which receive substantial attention in countries with more productive tax systems receive short shrift. Thus, questions of equity - of the progressivity or regressivity of taxes - and of economic efficiency - does the tax lead to a great reduction in the output taxed - receive very little attention. At this early point in the 1/ These calculations exclude the impact of this increase on military salaries. The Government would of course have the option of retaining part or all of the current pay scale for the military. - 268 - country's development, this single minded concern with marshalling resources for the public sector may be unavoidable. But looking beyond the completion of the current plan (1982/83) gives a different perspective. By then, if the government achieves its taxation target, the tax to GNP ratio will be far higher, and the economy somewhat more modern, complex and responsive to economic stimuli. By then questions of who pays taxes and how do they affect output may come into their own, because by then, the effects of taxes on incomes and production will be far more substantial than is currently the case. 11.22 One issue which is already of great concern is tax elasticity. Because of the drastic changes in tax administration of the last four years, it is impossible to reach conclusions on the elasticity issue. In addition, estimating 'tax elasticity in Afghanistan is made especially difficult because of what might be called administrative variability. More than elsewhere, the tax authorities unilaterally decide what taxes are due. In recent years, the tax legislation and codes have been used more as loose guidelines rather than regulations with unambiguous interpretations. The system of "unit administered values" - that is pricing taxable imports, exports and local production according to Ministry norms rather than actual value - simplifies the task of the tax collector but introduces an additional arbitrary element because the norms can be varied whenever the Ministry so desires. Tax officials, to a certain degree, therefore, can control collections, increasing them when there are short-falls and letting up the pressure in the opposite situation. Thus, administration is an important determinant of elasticity in Afghanistan. Nevertheless, as discussed below, such administrative elasticity has unde- sirable consequences on private economic activity. 11.23 In many, perhaps most developing countries, tax systems have been inelastic with respect to growth of income. A consequence of substantial inflation has been continuing "tinkering" in many countries to maintain even a static ratio of taxes to income. As noted, it is difficult to say what the situation is or will be in Afghanistan. A rapid expansion in progressive in- come taxes increases elasticity. But this is - as discussed above - not fore- seen. On the other hand, a foreign trade sector with a decreasing share of GNP would imply a falling tax ratio ceteris paribus, in Afghanistan, given the overwhelming share of trade taxes in the total. Thus, very rapid expansion in production for local consumption could imply a falling tax ratio. However, little change of this sort is expected in the current Plan period. And of course, as has been commonly the case, the decrease in trade taxes could be offset or more than offset by excises on new and increased domestic produc- tion. The most important change foreseen is the very rapid increase in revenues - tax and nontax - from the state enterprises. In most countries with mixed economies, state enterprises have averaged negative rates of return. (According to an IMF Study for the early 1960s, of 64 state enter- prises in 16 countries, the average rate of return before taxes was a negative 4.8 percent). 1/ It remains to be seen whether Afghanistan will be able to improve substantially on this performance. I/ Gantt Andrew H., and Dutto, Guiseppe "Financial Performance of Government- owned Corporations in Less Developed Countries," IMF Staff Papers, Volume XV, No. 1 March, 1968, pp. 102-40. - 269 - 11.24 Pushing aside these issues, there remains the most fundamental of all; Public resources are so extremely short in Afghanistan that basic needs remain unmet. For example the Plan foresees an enrollment in school of but 40 percent of those of primary school age by 1982/83. Hence in the near future, as in the past, most Afghans will be illiterate. Similar conclusions hold with respect to curative medical care, public health measures to eli- minate waterborne disease, and modern agricultural inputs. Thus, increased taxation beyond the already ambitious projections of the Plan appears desir- able if the proceeds can be used for meeting such needs (with their implied increases in productivity). This is not to argue that fiscal resources are likely to be the only constraint in meeting these needs. Obviously the capacity to plan and implement are critical considerations, but these are in turn not independent of the availability of fiscal resources to provide ade- quate staffing and training for the agencies involved. 11.25 It is probable that little more can be squeezed out of most trade taxes. For 1975/76, using the official trade data, the average rate of tax- ation on imports, other than those of foreign-aided projects, was already 32 percent c.i.f. value. Since duties are low on certain imports such as medicines and basic foodstuffs, the average rate on other imports so taxed as to maximize revenue must be very high indeed. For exports (excluding natural gas) the average tax was 11 percent of f.o.b. value. Increasing such taxes further would probably, as it has in the past, bring a substantial increase in smuggling and perhaps little increase in revenues. Even decreased revenue is possible. Moreover, the efficiency effects of excessive taxation of the leading sector, agricultural exports, may have distressing repercussions on future resource allocation. This is particularly important given that Afghanistan's comparative advantage will continue to lie with agricultural exports for at least several decades. Although there are good arguments for taxing away windfall gains from high international prices which are not expected to be sustained, it must always be borne in mind that a tax on output gives producers a strong reason for reducing the output taxed and doing something else. A better way in the long run to tax agriculture is through the land tax. This will give those taxed an incentive to use the land more efficiently - with desirable effects on output as a consequence. 11.26 In the case of taxes on personal and business income, the under- developed state of the administration of such taxes limits the amount which can be taxed without seriously damaging incentives. It may be that the government will be hard-pushed to achieve the real annual growth in this category of 10 percent as projected in the Plan. 11.27 One very desirable tax base, however, is largely unexploited: motor fuel taxes. In many countries, such taxes account for a substantial share of total taxes. Their ease of collection and substantial revenue potential makes them very attractive from the administrative viewpoint. Moreover, they also meet other criteria for an ideal tax; The tax most probably burdens the rich more than the poor, because of greater motor-vehicle travel of the rich, as - 270 - well as their consumption of items with a highway transport component. (Sub- sistence production is of necessity untransported. And subsistence production - such a large factor in the economy - concentrates among the poor.) Demand is inelastic since fuel costs as a proportion of total costs of a passenger or ton kilometer are low. What elasticity there is will appear in the long run, probably taking the form of reduced vehicle size so as to maximize mileage per. liter of fuel. In any event, because of the low elasticity of demand for motor fuel, the reduction in consumer surplus as well as undesirable effects on production due to distortions in relative prices, will probably be far less than for Afghanistan's existing trade taxes, particularly on the export side. Finally, an adequate tax on motor fuels would make possible the elimination of highway tolls, most of which should disappear since the roads, bridges and tunnels involved have substantial excess capacity even at peak traffic hours. 11.28 In 1976/77 the Fiscal Monopoly imported 90,000 tons of gasoline and 170,000 tons of diesel fuel. It plans to import 95,000 tons of gasoline and 170,000 tons of diesel in 1977/78. It markets the fuel at Af 8.5 and. Af 8 per liter for gasoline and diesel respectively. 1/ This price, although very low by international comparison, is still high enough to cover the costs of the monopoly and realize a substantial surplus which was used to cover most of the losses on the monopoly's sales of sugar in 1976/77. However, were the selling price doubled, it would still be lower than in many European coun- tries and total revenues would increase about Af 2.5 billion, assuming no impact on the quantity purchased. 2/ However, this gross figure would need to be reduced by the fuel consumption of government vehicles which may be as much as half of the total. Thus the net increase in revenues would be on the order of Af 1.2 billion or about 16 percent of total taxes in 1976/77. Ob- viously one would not increase the price of gasoline with one coup. Tranching would be desirable, perhaps over as long as 5 years. It could also be tied to elimnination of the various tolls, thus, providing some carrot along with the stick. 3/ As usual, there will be reluctance to undertake such unpopular Draconian measures. Yet introduction of such a tax will be easier today, with Afghanistan still on the threshold of the automobile civilization, than some years hence when the opposition to such measures will have increased greatly because there probably will be many more vehicle owners and users. 1/ In US dollars at the current exchange rate, this is $0.68 and 0.64 per gallon respectively. 2/ Calculation assumes 1,200 liters per ton, and consumption of 260,000 tons annually. 3/ In this context it would be useful to know what proportion of the tolls is taken by the costs of collection. - 271 - (v) Subsidies 1/ 11.29 Another way to increase uncommitted public resources is to reduce government subsidies. In fact when a government considers a major tax in- crease it would be useful to contrast the resulting "costs" with those of removing subsidies with an equal yield. In many situations subsidy-removal would be the preferable course of action. 11.30 For many reasons, most governments deliberately subsidize certain outputs, such as education. This is also true of Afghanistan which has an unusually numerous and diverse collection of subsidies. Moreover there is some evidence that current policy is to introduce additional subsidies and broaden existing ones. In the language of the Plan (Vol. I, p. 47): "As Government attaches great importance to public welfare and a higher standard of living for the Afghan people, a significant increase in the expenditure on subsidizing the price of sugar and gasoline and other measures of social welfare is anticipated." If the government is serious about such subsidies, it is continuing upon a course which could greatly reduce the rate of growth as well as frustrate the achievement of some of the very goals it pursues through the subsidy program. Specifically, the subsidies could easily, as they already have in countries like Sri Lanka, Egypt, Iran and Peru, consume three or more percent of GNP. These are resources which the Government could use very productively elsewhere, for example in agricultural development or expanded primary education. A most basic problem with subsidies is their control. Once a subsidy is considered customary it is difficult to reduce it. Subsidies can be initiated now at very little cost in many sectors, but the growth in consumption of the goods or services involved over time may be substantial. The Government may then be faced with an immense fiscal drain which is politically difficult to stop. 11.31 In general both consumer and production subsidies also have high "leakage." As concerns the former the rich purchase as much food and other basics as the poor. If the latter are defined as the bottom two quintiles, then to assist them by a given amount may require an outlay about two. and a half times higher. A less expensive approach is to identify the poor and provide only them, either free or at a subsidy price, with a special currency (e.g., food stamps) which can be used to buy only certain approved products. The distributive effects of subsidies in production, e.g., loans at very low rates of interest, are more difficult to unravel. However here too the evi- dence suggests that the wealthy benefit far more than the poor. 11.32 Any subsidy has the consequence of making the item subsidized appear less costly than it is. In other words, pricing at less than scarcity value will lead to consumers consuming more than they otherwise would, so that their 1/ A subsidy exists whenever an output is sold below cost, including adequate return to any capital used to produce the output. The subsidies examined here are exclusively those where the uncovered costs are borne by gobern- ment. - 272 - satisfaction is not commensurate with cost. In the case of a "merit good" such as primary education this is all good and well. In the case of say transportation, there may be more harm done through over-consumption than good resulting from meeting certain needs. 11.33 At this point a taxonomy of existing subsidies is useful. Table 56 lists some of these. Table 56: A TAXONOMY OF SELECTED PUBLIC SUBSIDIES Selected Subsidies Beneficiaries Full-Cost Pricing Expansion Feasible Elimination Planned/ and Households Producers Planned Expiected Desirable Public Enterprises Coal Mines X X X X Bus Company Kabul X X X ? Bakhtar Airlines X X X X Hotel Corporation X X X X Other X X X X Social Services Primary Education X X X Post-Secondary Education X X X ? Clinics/Hospitals X X Public Health Activity X X X Commodities Sugar X ? X Gasoline X X X Civil Servant Wheat X X ? Economic Services/ Inputs_ Agricultural Extension X X X Irrigation Water X X ? Highway Services X X X ? - 273 - An obvious feature in the table is the inclusion of several items as subsidies usually not considered as such; highway services for example. At present, the subsidy to the highway system is the largest, by far, in the country. It is clearly billions of Afghanis per year. This is clear once we impute a return to the extremely large investment of the highway system. A similar conclusion holds as concerns the capital tied up in the irrigation system. In both of these cases a system of user charges is feasible. In the case of highway ser- vices, the fuel tax is a crude user charge. In certain countries its magnitude and the volume of traffic are so high that the highways, rather than being subsidized, are even taxed. This puts the earlier discussion of the gasoline tax into a different perspective. Increasing gasoline taxes would bring charges for the use of the highways closer to their actual costs, although for a long time to come, traffic and associated taxes on Afghan highways will be far below what is needed to cover the total costs of providing the highway services. 11.34 A number of the subsidies are accidental, in that the government did not plan them but was forced into them because of some combination of unfavorable circumstances. These are chiefly in the category of the state enterprises. Government policy is that these enterprises should contribute to rather than be a drain on public revenues, and currently it is giving some attention as to how this might be achieved. There are a number of other subsidies to state enterpises which are seen as temporary assistance until the "infant industry" grows up. Possibly the Airlines and the Hotel Corpora- tion, would be in this class. 11.35 In the case of social services subsidies are being given for a truly "public good", namely public health activity, and for a basic "mixed merit good," primary education, where the community derives a great deal of benefit as well as the individual household. For this and other reasons, there is a general consensus on the high priority of these subsidies, though even here, the coverage and degree of subsidization should be a matter for careful review. The supply of free drugs through the public health program is for example open to serious question (see para. 9.65). 11.36 There are a number of others. Coal is sold to households below cost, both to help the consumer and to reduce the destruction of Afghanistan's few remaining forests. How much the poor actually derive from this is unknown. Similarly the bus company in Kabul receives an annual subsidy, which may be of little benefit to the very rich but is certainly of no benefit to those who are too poor to travel by bus. The state run buses operate alongside unsub- sidized private buses so that the subsidy is in practice a recognition of public sector inefficiency rather than a benefit to bus users. As noted earlier, wheat for civil servants receives a very considerable subsidy (Af 250 million in 1975/76). This really is a form of salary payment and it probably should be converted to an increased wage, which would permit the employees to buy what they need most. 11.37 A major reason the Government subsidized sugar was to hold down prices during the sharp upswing of 1976. This was understandable, but it is questionable whether fixed sugar prices need to be maintained now that world - 274 - prices have returned to more normal levels. The Plan projects growth of sugar consumption at 6.3 percent annually. It would rise by 53 percent over the Plan period and double in 11 years. Hence a fixed subsidy per kilo would also grow as rapidly. What is true of sugar is also true of other subsidies such as bus transport, coal, and higher education. Together these, and perhaps others of which we are unaware, could grow so quickly - as they have in several coun- tries in the past - that the increase in fiscal resources as the economy grows would be pre-empted to cover the costs of subsidies. Funding desirable alternatives no matter how attractive or pressing could not be considered. 11.38 Higher education has been included in the group above because the beneficiaries of it, in Afghanistan as elsewhere, are for the most part from the higher income groups of the community. To provide them with such a sub- sidy really is a case of making the rich richer. Clearly the universities should distinguish between rich and poor, and should restrict the larger sub- sidies (free places, pocket money) to the poor. Gearing the subsidy to need, and introduction of educational loans, should be considered as alternative modes of financing higher education, particularly in a country where resources are as scarce as in Afghanistan. 11.39 Focusing now on the equity aspects in general, it is probable that every subsidy listed in Table 56 benefits the wealthy disproportionately. Specifically, were it possible to calculate the distribution of the costs of the various subsidies among recipient households, there would probably be a positive relationship between household income and size of subsidy. Notwith- standing the Plan's assertions of using subsidies to bring "a higher standard of living for the Afghan people," thus far the subsidies have probably bene- fitted most that part of the population already enjoying the higher standard. 11.40 As noted earlier curtailing subsidies has as a corollary the release of resources for other uses. This outcome cannot be overstressed in a country which taxes but 7 percent of a very small GNP. To a greater degree than most other countries, Afghanistan cannot afford subsidies. It is useful to recapitulate the conclusions: (1) The subsidy for higher education should be reviewed with an eye to its reduction, for the well-to-do. Alternative -modes of financing higher education should be examined. (2) The sugar subsidy needs to be eliminated. (3) Petrol taxes should be greatly increased inter alia to move closer to payment for the costs of highway services. (4) Consideration should be given to reducing or eliminating other subsidies; e.g., coal, airlines, irrigation water, drugs. 11.41 The manner in which the government accounts are kept provides poor information on subsidies. Some entities are budgeted as receiving subsidies - 275 - while simultaneously transferring revenues to the government. Genuine sub- sidies to enterprises are lost in the accounts of ministries. 1/ Those subsidies of greatest concern because of their potential growth, as well as their controversial nature; e.g., of enterprises, of commodities, and of higher education, should be explicitly listed, calculated and projected through the Seven-Year Plan. (vi) Fiscal Resources: The Relative Contributions of the Private and Public Sectors 11.42 As an economy in the early stages of development, Afghanistan has the usual preponderance of production in private hands. The Government has opted to develop future production, outside of agriculture, largely - although not wholly - under public ownership and control. Most development resources have been and are used to develop infrastructure and state enterprise. The recent nationalization of private banks and the enterprises owned by these banks is also a consequence of this approach. The Plan confirms this ,in many ways. In the entire document, there is very little discussion of the private sector, and no quantitative material whatsoever. One reference describes the planned division of labor between public and private activity: 2/ "The industries which need only limited capital funds, involve a short gestation period and require simple technology will be developed within the private sector.... Those industries which are considered to be key areas from the point of view of social benefit and those which take the form of industrial and social overhead will be developed in the public sector." Notwithstanding this delineation into private and public arenas, in the last four years, outside of agriculture, the Government's approach has had the result of discouraging private activity. To illustrate, as cited in Chapter V, between early 1974 and late 1977 the Investment Committee of the Ministry of Planning approved only 28 private investment proposals for tax and other benefits under the Foreign and Domestic Private Investment Law. And of those approved, many have not been implemented. As noted earlier, business taxation appears to be arbitrary with a demoralizing effect on the private sector. The absence of a statute of limitations and of an appeals procedure to counter what may appear as unwarranted assessments could also be seen as a lack of concern with nurturing the private sector. 3/ This posture has not been costless. Low levels of private investment have been the consequence. 1/ These issues are discussed in the Appendix on Presentation of Govern- ment Accounts in Volume II. 2/ Plan, Volume 1, p. 38. 3/ Administrative reform of procedures for business taxation as well as measures to implement the FDPIL are discussed in detail in Chapter V. -276- 11.43 Notwithstanding such private sector disarray, it still generates nearly all taxes, e.g., 93% of the total in 1976/77. 1/ In contrast the public sector contribution to revenues continues to be overwhelmingly a potential one. According to the Ministry of Finance Presidency for Public Enterprises total historical investment in the Tasady enterprises 2/ has been somewhere between Af 13 and 40 billion. Even less is known about how much unreplaced depreciation has occurred, or how inflation has affected replace- ment costs of assets. According to the Finance Ministry's Presidency for Budgets, the consolidated annual budget for gross revenues of Tasady enter- prises for 1975/76 was Af 3.31 billion. (Figures for net revenues are not available.) If a capital-output ratio for the enterprises of about 4 is assumed, admittedly on the low side, and this is applied to gross revenues, we end with total capital close to the lower bound estimate. Assume, therefore, a total Tasady enterprises' capital stock of Af 13 billion. Were this to earn a net rate of return of 15 percent, the potential transfers to Government would be Af 1.96 billion, 29 percent of taxes in 1975/76. Actual revenues generated by these enterprises were probably close to zero: the surplus of the profitable enterprises, particularly the Afghan Textile Company, may have been about equal to the losses of the others. But other types of public industry should also be included: those which are parts of ministries, the government majority shareholdings and majority shareholdings by organizations themselves under government control. An estimate of 29 percent of taxes as a possible revenue addition is, therefore, far lower than what could be done with all the state enterprises. 11.44 In the last 2 years, the Government has become increasingly con- cerned with the fiscal contribution of the state enterprises. A number of initiatives including new state enterprises legislation and a project to substantially improve enterprise accounting are pending. But even if these proposals are successful, they will not make the private sector obsolete. Reliance on private activity to generate most of the resources used by the public sector will continue. This suggests the desirability of encouraging the growth of private activity: Government will be able to pluck far more from a healthy and growing goose, than one which continues moribund. In addition to the question of generating public resources, the present policy throws a very heavy additional burden on an already overburdened administra- tion. The latter is now responsible for the entire formulation of the devel- opment effort. It must both mobilize nearly all resources and in turn see to their investment. The initiative and talents of the private sector are not being exploited or developed as a means of reducing some of the load on the Central Government. 1/ See Volume II, Table 5.8. 2/ The 41 Tasady enterprises have always been wholly owned by Government. Many are production enterprises. But the category also includes 3 small port authorities, the Afghan's Women's Society, the Religious Trust and a number of similar organizations. See Chapter VI. - 277 - 11.45 Clearly, therefore, development of certain kinds of private activity is desirable. In this context, the recent set of actions designed to support specific private activities is all to the good: The changes in savings de- posit rates, the adoption of IDBA's small industry finance proposal (see Chapter V), the large increase in credit to individual farmers. 1/ Never- theless, these changes alone will not make the private sector an active partner in the development process. Government needs to generate a sus- tained and consistent policy of support for certain kinds of private activity. Some obvious elements in this support would be an administrative review of the tax system to determine where arbitrary elements should be reduced, greater reliance on objective tax regulation and institution of a tax appeals process. 11.46 The Report emphasizes the desirability of increasing agricultural production in the conviction that there lies Afghanistan's comparative advan- tage, at least in the near term. This implies more stress on supporting private farmers in situ. In this context, it is noteworthy that the share of agricultural households in taxation is probably already higher than their share of marketed income. If agriculture in total is undertaxed, it is be- cause of the difficulty of taxing outputs which are unmarketed. The agri- cultural population may pay 35 percent to 40 percent of total taxes. See Volume II, Table 5.8. Total GNP originating in agriculture is about a half. Of this half, about two thirds is marketed production. Thus, marketed GNP in agriculture is about a third, close-to, but probably less than the share of total taxes paid by agriculture. 2/ A substantial decrease in subsistence production and a rapidly growing agricultural sector could therefore, have very favorable tax-effects. Thus in fiscal perspective, support of agricul- tural growth may be superior to the emphasis on state enterprise investment. 11.47 This section has as its primary focus, resource mobilization through the fiscal mechanism as it affects the private sector. But this is only part of the story. Financial institutions in Afghanistan are underdeveloped with negative repercussions on the amount and allocation of private investment and saving. These elements are discussed in the following section. At this point it is useful to note that all banks are public and the degree to which resources will move through them into investment depends again on whether the private sector is healthy and whether it has confidence in the behavior of public institutions. In brief a growing, confident private sector will not 1/ These items are discussed in the following section. 2/ A more meaningful measure is net budget incidence defined as taxes paid, less the cost of benefits received. Such benefits consist of various subsidies plus outlays for education, medical care, agricultural assist- ance, transportation services and so forth. The net tax paid measures the household contribution to the fiscal system. In most countries, benefits received by the rural population are below those of urban dwellers. If Afghanistan is typical in this respect, agricultural households may be contributing substantially more than their "fair share" toward covering the costs of public overhead functions and the development budget. - 278 - only lead to higher tax revenues, it will also increase development through increased private saving and investment. But, perhaps above all, as a partner in development it could also greatly reduce the heavy burden on the public sector. The combined effect would be a substantial increase in growth and welfare. B. Banking (i) Financial Intermediation in Historical Perspective The Banks 11.48 The banking institutions in Afghanistan are shown in Table 57 below. Table 57: BANKING INSTITUTIONS OF AFGHANISTAN Institution Date Established At Founding Commercial Bank-i-Melli 1932 private Da Afghanistan Bank (DAB) 1939 public Pashtany Tejaraty Bank 1959 public Export Promotion Bank 1976 public Specialized Mortgage and Construction Bank 1948 public Agricultural Development Bank (AgBank) 1954 /a public Industrial Development Bank (IDBA) 1973 private /a Reorganized in 1969 and rechartered in 1970. Bank-i-Melli (National Bank), founded in 1932 was Afghanistan's first bank of any type, and the nation's sole private commercial bank until its nationaliza- tion in 1975. It took its model, as well as its early officers, from German banking, and used its resources to develop a number of industrial enterprises, many of which proved extremely profitable. No doubt in part because of Bank-i- Melli's success, the Government established the Da Afghanistan Bank (DAB) with some central banking functions in 1939. It soon became the leading commercial bank as well. A second purely commercial bank, Pashtany Tejaraty, was estab- lished in 1948, it has occasionally been in serious difficulty requiring loans from DAB. DAB and Bank-i-Melli have several dozen branches, although the former uses its branches almost exclusively to manage the government's accounts. Neither bank permits branches to make loans. All loans are made in Kabul. There has been little competition among the three banks, in apart due to substantial inter-locking directorships and equity participation. In his study of the Afghan economy Fry states that: 1/ "Interest rates have remained 1/ Fry, Maxwell J. The Afghan Economy: Money, Finance and the Critical Constraints to Economic Development, (E.J. Brill, Leiden) 1974, p. 106. - 279 - low and stable, advertising is neglible and there is no search whatsoever for business. Bankers wait for customers, who on the loan side have to meet increasingly stringent collateral requirements and do not contemplate any innovations or other action which might disrupt the market share balance." In 1976 the Export Promotion Bank began operations as a fourth commercial bank. Its major activity is to be short-term export financing. Loan capital for the new bank totalling US$15 million has been received from Iran and Iraq. DAB has provided a temporary loan of Af 100 million. As of May 1977 its lending came to Af 167 million. These four banks are the commercial banking sector. 11.49 Not unexpectedly commercial banking has largely stagnated in recent decades. Demand deposits normally increase as a percentage of money as a country develops. In Afghanistan the reverse has been occurring. In 1954/55 they accounted for 35 percent of the money stock (currency plus demand deposits). For the three years 1974/75 through 1976/77 they averaged 22 percent, with a trough in 1973/74 of 17 percent. Moreover as indicated in Table 58, between 1972/73 and 1975/76 - in real terms - lending to the private sector by the three established commercial banks increased by only 5 percent while increasing less than 4 percent to the public sector. In 1976/77 in part because of the large surplus in the balance of payments, the stock of money increased 32 percent bringing in train a substantial increase in credit of the commercial banks and DAB to the private sector. However, much of this expansion is in nominal terms. 11.50 In spite of Bank-i-Melli's early experience with investment banking, today most credit is in the form of short term loans. Private industry has financed longer term investments through its own savings, together with foreign participations and loans, above all supplier credits, and some bazaar loans as well. 11.51 When we turn to the three specialized banks (see Table 57) a similar picture emerges. Stagnation well describes the Mortgage and Construction Bank and the IDBA. In the last decade the former, which can only lend to govern- ment employees, has ceased any new lending of consequence. The reason com- monly given for this is the difficulty of collecting debts from government employees. The IDBA has disbursed 13 loans since its establishment in 1973. A closer look at IDBA's experience is illuminating. Originally established as a private bank in 1973, its share capital came to Af 240 million, of which 40 percent was held by foreign banks and the International Finance Corporation of the World Bank. The Bank can provide loans to private industry for both fixed assets and working capital, as well as purchase equity. (IDBA has one equity participation.) With a view to identifying investment opportunities, IDBA has set up a Project Investigations Department which over a two-year period carried out preliminary investigation for more than a hundred projects. Although chartered as a bank, through most of its brief history, IDBA has acted as a management consulting firm. The recent adoption of a Development Assistance Fund for small-scale industry, however, promises to give IDBA a new lease of life and the opportunity to become the key development insti- tution which was envisaged at the time of its founding. 11.52 Leaving DAB to the side, the major exception to the general picture of stagnation is the AgBank. Its lending increased very rapidly in the last - 280 - 4 years. Most of the thousands of loans made were for financing fertilizer, as part of the implementation of the government's decision to increase its use very rapidly. Many of the borrowing farmers may have been confused as to whether they were receiving a loan or a government handout. In any event, defaults on the early loans have been extremely large. But as agreed, the Government has compensated AgBank for the uncollectible debts on this account. 11.53 The progress of the banking system is shown in Table 58 below. Table 58: DOMESTIC CREDIT OUTSTANDING, DAB, COMMERCIAL BANKS, SPECIALIZED BANK,1972/73, 1975/76, 1976/77 (Af millions) 1972/73 1972/73 1975/76 1976/77 (Af with purchasing power of 1975/76) /a) Public Sector (1) DAB (net of Gov't. deposits) 8,940 10,817 11,188 13,680 Private Sector 4,279 5,178 6,231 7,596 (2) DAB plus commercial banks /b 3,861 4,672 4,915 6,171 (3) Specialized banks 418 506 1,316 1,425 /c (4) Agricultural Development Bank of Afghanistan (384) (465) (1,181) Private sector less AgBank 3,895 4,713 5,050 /a Price increases 1975/76 over 1972/73 estimated at 21 percent using revised national price index. /b net of loans to specialized banks. Net total for 1975/76 and for February 1977 assumes a constant percentage of loans to specialized banks beginning in 1974/75. /c Estimated on the basis of the December 1976 ratio to total private sector deposits. Note: Domestic credit consists of loans, discounts, overdrafts, and to a very limited degree, participations by the specialized banks in individual enterprises. Public sector is defined to include the central govern- ment, the Food Department, and the fiscal monopolies - chiefly those for sugar and petroleum. Other government enterprises are defined as part of the private sector. Their borrowing from DAB and the commercial banks was relatively small. In 3 years it was (Af mil- lion): 261 (1972/73); 332 (1973/74); 450 (1974/75). Sources: (1), (2) Volume II, Table 6.1. (3) DAB, Consolidated Statement of the Specialized Banks. (4) Fry, p. 138 and Report No. 1490-AF, World Bank, "Appraisal of a Third Agricultural Credit Project Afghanistan," 5/12/77, Annex 3, Table 2. - 281 - It is apparent from this that the formal financial system is also underdevel- oped. The ratio of bank assets to population is on the low side, even when we take into consideration Afghanistan's low income. There are several reasons for this: The extreme centralization of banking activity in Kabul means that the provinces are largely out of the system. Banking activity unavoidably involves reading and writing, and with over 85 percent of the population illiterate, most people simply cannot use banks. A less obvious reason is the distrust of Banks and other public sector institutions. Several years ago AgBank attempted to induce farmers to accumulate savings in special accounts. The scheme was unsuccessful and abandoned. It is commonly believed that widespread distrust of savings institutions was a major reason for the failure. More recently the Government has taken steps, such as instructions to bank to ensure the confidentiality of accounts, which it is hoped will increase public support. The Bazaar 11.54 Although the formal financial system is rudimentary and undynamic, the so-called informal system may not be. For centuries, money lending and foreign exchange dealings have been a major activity in the bazaars of Kabul and elsewhere in the country. Nevertheless, not a great deal is known in quantitative terms about these activities, other than their interest rates. Possibly, even after correcting for the greater riskiness of bazaar landing, the rates are higher in the bazaar than in the formal institutions. It is also well known that the bazaar finances many activities, including consumer loans (weddings), working capital (crops, retail inventories), housing and other construction, longer term industrial undertakings, and above all, for- eign trade. (In Kabul, by far, the quickest way to purchase foreign exchange be it currency in hand or a draft drawn on a foreign bank is to go to the bazaar.) What is not known with any precision is the relative importance of bazaar transactions in total financial intermediation. However, Fry esti- mates that ia 1972/73 the Kabul Money Bazaar accounted for 65 percent of annual turnover in foreign exchange. In fact, his estimates of bazaar transactions lead him to suggest that for 1972/73, "an upper limit to smug- gling (was] $106 million or 40 percan of total recorded trade." Similarly, according to Fry: 1/ "In Herat, a small survey at a meeting of the Chamber of Commerce produced estimates that 50 percent of agricultural production expenses, 40 to 50 percent of trade and 30 percent of construction investment was financed by noninstitutional credit at annual interest rates of between 20 and 40 percent." He also points out, that in Herat as in other provinces, the relative importance of non-institutional finance is significantly greater than in Kabul because bank loans are extended only from Kabul. 11.55 This suggests that bazaar intermediation may be far more important in financing economic activity than the formal institutions. Our picture of financial stagnation may, therefore, be, misleading. As Fry notes, for 1962-1972: 2/ "Over the past decade the money bazaars have undergone a period of rapid growth. The volume of business has increased substantially, specialization has occurred and technical improvements such as the widespread installation of electronic calculators have taken place." It is possible 1/ Fry, pp. 241-243. 2/ Fry, p. 236. - 282 - that the expansion asserted by Fry has persisted through the mid-seventies to the present. 11.56 The Government in general and formal bankers in particular regard the bazaar as a necessary evil. Banking officials occasionally express the hope that it will fade away, to be superseded by the formal financial sector. In the intervening decades, there remain some important questions: (1) Does the bazaar finance worthwhile activity or carry out other socially desirable functions? More concretely, what sectors depend upon bazaar finance? How extensive is it? Are these sectors in any sense hamstrung because of the harsh terms of bazaar finance? Would additional funding be desirable? (2) Bazaar interest rates are typically 2 percent to 5 percent monthly. Is the dif- ference in interest rates between formal sector and bazaar explained largely in terms of risk premiums? (If 2 percent of the amount lent per month goes bad, interest at 3 percent per month would mean an effective return of 11.5 percent annually). Or is bazaar lending truly very profitable? If so, can and should the government banks participate in such lending? (3) In event of loan default, what remedies are available to bazaar lenders? Can the public banks learn anything here applicable to their own situation - particularly given the continuing difficulties in Afghanistan with finding acceptable loan security and the problems of receiving compensation for bad debts? (4) What are the sources of funds for bazaar-lending? Can any such be attracted into bank deposits of one sort or another? Would this be a good idea? 11.57 More generally, intelligent economic planning requires the basic facts about the fundamental economic institutions in the country. The bazaar may be of major importance to the country's development. A good idea of what goes on there would clearly be a very useful input into the planning process. A big step forward might be the elimination of the current extreme fragmen- tation of finance between formal and bazaar sectors. Possibly some very productive small firms are starved for funds and would grow rapidly as a result of new funding through integration. In this context, the results of the IDBA small loan program may indicate whether this is the case. In brief, a study of bazaar finance along the lines developed above could improve decision-making with respect to banking. (ii) Recent Changes 11.58 Most recently there have been several changes in the organization and regulations of the banks. The Banking Law of June 1975 nationalized Bank-i-Melli and IDBA making all banks, commercial and specialized, publicly owned and managed. No doubt the actual nationalization of the banks - through which the government also replaced Bank-i-Melli as the part or sole owner of the Melli enterprises - many have had a demoralizing effect on private activ- ity, and given impetus to formal sector stagnation. 11.59 Nevertheless, several actions taken in 1977 will be wide-reaching in their effect and should stimulate bank activity. To begin, the government has approved a small industry lending facility for IDBA. Loans will be to firms with investment in machinery of less than Af 4 million at the subsidized rate of 6 percent annually with grace periods of I to 2 years. Processing loan requests will be far simpler than IDBA's normal procedure with financing up - 283 - to 70 percent of the approved investment. And in the words of the proposal "security shall never be a constraint for granting a loan." (In the past, because of poorly developed legal sanctions to provide compensation for bad debts, IDBA's security requirements have been extremely stringent; e.g. on normal loans IDBA takes legal -4tle to the collateral and returns it only after repayment has b-n completed. Afghan businessmen lacking faith in banks have been reluctant to enter into loan contracts under such circumstances. This is given as one reason for IDBA's very limited Dast lending). The initial response to this scheme has been most encouraging. (See para. 5.27). 11.60 The Government recently took several decisions with respect to banking conditions: (1) Interest rates have been increased to more realistic levels. The maximum rate on time deposits is now 10 percent while maximum lending rates, are now 12.5 percan- ( ee Table 59). The lending rates may still be below the net rates of the bazaar, and therefore, no doubt lower than what would reign were the money markets truly integrated. Table 59: ANNUAL INTEREST RATES ON BANK DEPOSITS AND LOANS (in percent) Previous Effective Effective Rates June 1975 June 1977 Da Afghanistan Bank Savings deposits 6 8 9 Loans to banks 7 9 9 Other loans 9 11 11-1/2 - 12-1/2 /a Commercial banks Savings deposits 6 8 9 Loans to customers 10 11 11-1/2 - 12-1/2 /a Da Afghanistan Bank and Commercial banks Time deposits - 3 months 3 /b 4 7 Time deposits - 6 months 4 lb 6 9 Time deposits - 12 months 6 7 10 /a The regulation fixes the rate at 12 percent, but the banks have the option to vary this within a band of 0.5 percent. /b Bank-i-M4elli only. Source: Da Afghanistan Bank. (2) The Government has instructed the banks to insure confidentiality of bank deposits. This will promote increased customer confidence in the banking institutions. - 284 - (3) Transfer of funds among domestic banks is tax free. Hitherto there has been a tax of 1/10 percent on the amount transferred. (4) The banks are to begin a campaign to promote savings deposits. Among other things, the public will be informed that interest rates have been increased, that prizes will be awarded from a savings account lottery, and that financial savings continue to be exempt from income tax. (5) The authorities are also considering the sale of government bonds or bills to the private sector. This is largely seen as a stabilization measure whose immediate effect would be to reduce the large increase in liquidity resulting from recent monetary growth. However, these proposals also have important implications for public finance as well as the development of financial intermediation. Needless to say the success of any such undertaking will depend upon public confidence, rates of return and the ease of encashment. 11.61 The interest rate increases on savings deposits, which are designed to induce greater financial saving, are all to the good. But they have led to an anomalous situation. Should IDBA lend for small industry at 6 percent, it will be profitable for the borrowers to use cheaper bank funds rather than their own savings which can earn 10 percent as 12 month time deposits. A similar argument holds as concerns lending by AgBank at its usual rate of 8 percent. The moral here is obvious. It will be necessary - in a system of managed interest rates - for the government to approach interest rates sys- tematically and not piecemeal. A rate of 6 percent for loans to small industry raises questions. The costs of such.loans are substantially higher than larger loans and at 6 percent IDBA may actually incur losses. There is some justification for this at present to dramatize this new facility and to overcome the initial reluctance of small businessmen to approach formal institutions. In the longer term, a rate at least equal to that of the AgBank's 8 percent is preferable. If most small borrowers are unable to pay more than 6 percent, it suggests that they are not using funds very produc- tively in an economy where returns may often be several times higher. However such low productivity of investment of the small borrower is unlikely. The problem with small industry is not one of credit being available only at 12 percent or 24 percent but rather credit not being available at all, or at rates which really are far above the marginal efficiency of capital. In an effort to fund the small firm, for the reasons given above, it is undesirable to go to the other extreme of substantial subsidization. 11.62 Actually even 8 percent for both AgBank, and IDBA is extremely low. It is probably far below the net bazaar rate for similar loans. It is lower than the highest commercial bank rate (9 percent) on savings deposits. And if recent history repeats itself it will be only slightly positive in real terms: The best estimate of inflation is 7 percent annually over the four years 1972/73 - 1976/77. And the expected growth in money stock for 1977/78 of 15-17 percent suggests that future rates may also come close to 7 percent. Consequently lending at 8 percent, after deducting costs, and losses may imply a situation where the capital of the financial intermediaries is slowly eroded. The entire rate structure of the specialized banks needs review. - 285 - 11.63 Other steps also need to be taken to strengthen the banking system. The first relates to the development of banking outside the capital. With the exception of AgBank, nearly all bank loans are approved in Kabul. Although some loans made in Kabul are for activities in the provinces e.g. cotton and Karakul trading, the majority of such lending benefits projects in or near Kabul. Yet there probably are numerous useful projects outside of the capi- tal which could benefit from bank finance. Kabul does not have a monopoly on viable investments. This suggests the desirability of decentralization. Initially a bank, perhaps Bank-i-Melli, could lay down guidelines permitting several of its branches to approve loans. The resulting experience could be used as feed-back to further develop branch-lending. The second step relates to the upgrading of training facilities. Outside of AgBank and IDBA there are no internal training facilities. An Institute for training commercial bankers (to supplement rather than displace the training programs of the specialized banks) deserves high priority. In addition, consideration needs to be given to raising salary levels in the nationalized banking institutions. This should reflect not only higher civil service salaries, but an appropriate differential to enable the banks to attract qualified staff. Such differen- tials would help to compensate for the higher status and other opportunities which are available to civil servants. C. The Determinants of the Price Level 11.64 Price stability defined as, say, an average rate of inflation of less than 6 percent annually, is highly desirable in Afghanistan. The reasons for this are near at hand: The institutional structure - which is extremely unwieldy - requires price stability to function adequately. Concretely, the interest rate system makes sense only if there is little inflation. And, as has already been abundantly illustrated, pushing state enterprise prices up to rational levels is already extremely difficult. Rapid inflation would only further complicate the problem, in part by making even more difficult the per- ception of actual profit and loss. There is also the Government's commitment to keep down prices of basic foods and fuel, since in an inflationary situa- tion this could mean subsidies which can very quickly become a sizable share of government resources. In addition, there are also the classical problems which inflation brings to the private sector; for example, false signals to investors leading to excessive investment in stocks and real estate; disruption of financial intermediation because of uncertainty on the future value of money; possible disarray and breakdown in the foreign exchange markets when, say, bank sales of foreign exchange are at fixed or lagging prices. At the same time, the country hardly has idle resources "ready to go," needing only the stimulus of excess demand to bring them into production. In Afghanistan increasing aggregate demand, for example through large public deficits, will bring in train primarily price increases, and the difficulties mentioned above, with very little increase in production. 11.65 Consequently in this section we are interested in the price level first as a variable whose movement needs to be explained, and secondly as a variable to be publicly controlled. In many countries such analysis emphasizes the determinants of the stock of money, since changes in money supply and associated price changes are so large as to cause substantial and persistent inflation. In Afghanistan, in part because annual price level movements have - 286 - recently been fairly small, an average of about 6 percent over 1972/73 - 1976/77, there is a need to look at other variables as well. For this purpose we turn to the equation of exchange (MV = PY) because of its simplicity and familiarity. 11.66 Historically it is difficult to identify a simple relationship between monetary and price developments in Afghanistan. Several variables are involved. To begin, prices are greatly affected by fluctuations in agricultural output. Substantial price increases in 1970/71 and 1971/72 were accompanied by monetary expansion of only about 7 percent annually. The increases largely reflected drought-induced shortages of basic agricultural commodities rather than increased aggregate demand caused by an increase in the stock of money. By contrast, in 1972/73 when the money supply increased 17 percent, the price level declined 10 percent due to the return of more normal agricultural supply conditions. In turn the surge in prices (15 percent) in 1974/75 has been attributed primarily to speculative hoarding of foodgrains and occurred despite a rate of monetary expansion of but 10 percent. Table 60 below illustrates these trends. Table 60: BASIC DATA FOR MONETARY ANALYSIS 1971/72-1976/77 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 (1) Price Level 115 103 100 115 123 127 (1973/74 = 100) (2) Real GNP 91 90 100 109 114 121 (1973/74 = 100) (3) Money Supply 8.17 9.53 11.00 12.09 14.43 19.48 (end of year) (4) "Real" Money Supply 7.10 9.25 11.00 10.51 11.73 15.33 (Base 1973/74) (5) Relative Income Velocity 140 107 100 114 107 87 (1973/74 = 100) (6) Free market- exchange rate /a 80.5 60.7 56.6 55.0 47.4 (7) Net Foreign Assets (Af billion) 2.23 2.65 3.26 4.18 6.93 10.58 Changes in Percent (8) Price Level -10 -3 15 7 3 (9) Real GNP -1 11 9 5 6 (10) Money Supply 17 15 10 19 35 (11) "Real" Money Supply 30 19 -4 12 31 (12) Income Velocity -24 -7 14 -6 -19 (13) Free Exchange 33 7 3 16 Rate (appreciation) (14) Net Foreign Assets 19 23 28 66 53 /a Average number of Afghanis per US dollar. The bazaar rate is the free market rate. Sources: (1) and (2) see Vol. II, Tables 2.1 and 11.1; (3), (6) and (7) DAB, Research Department and see Vol. II Tables 6.1 to 6.3 - 287 - Notes (1) For a description of the price level (P), see Volume II. (2) "Real" GNP (Y): GNP converted to prices of 1973/74. (3) The money supply (M) is defined as demand deposits (excluding those of the central government) and currency outside of banks. In the last 5 years currency has accounted for slightly over 81 percent of the money supply. See Volume II, Table 6.1. (4) "Real" money supply: The money supply of any given year expressed in prices of 1973/74. It is equivalent to a comparative measure of the total purchasing power of the stock of money. (5) Relative income velocity (V): (PY/M), where the value for 1973/74 is converted to a base of 100 and other years are altered accordingly. (6) Free market exrhange rate: Average number of Afghanis per dollar. The bazaar rate is the free market rate. (7) Net loreign assets of the banking system as measured by DAB. See Volume II Table 6.1. 11.67 The level of prices is also affected by the rate of foreign exchange. An appreciating Afghani implies a falling (or less rapidly rising) price level as the import components of the pric- 'nd-x fall with the decrease in the price of foreign exchange. The data are not adequate to measure this effect, but presumably it is of some significance. In other words, the gradual appreciation of the Afghani (free market rate) of about 70 percent in the four years following 1972/73 must have reduced the rate of price increase. 1/ 11.68 A third price-determinant of great importance is the set of factors which determines the average quantity of money which households, firms, and other economic "actors" hold. A measure of these "real" balances (M/P) is given by row (4) n Table 60. In terms of 1973/74 prices, the total real stock of money nearly doubled from Af 7.10 billion in 1971/72 to Af 15.34 bil- lion in 1976/77. Some of this increased demand for money is a consequence of the growth of income. A larger income requires a larger stock of money to generate and consume it. But this is only part of the story. Since 1974/75, average cash balances held by the various actors in the economy have increased more rapidly than nation-l income (PY) so that income velocity (PY/M) has decreased. As shown in Table 60, row (4), it decreased 13 percent from 1973/74 to 1976/77. Had this fall not occurred, with the given nominal 1/ For the determinants of the exchange rate appreciation see Chapter XII. There is enough evidence to argue that it is indeed a cause of modest inflation rates rather than an effect of them. - 288 - stock of money - e.g., Af 19.4 billion in 1976/77 - the rate of increase in prices would have been higher. It is useful to attempt to determine why this drop in income velocity occurred, i.e., why the demand for "real" average cash balances increased more rapidly than income. 11.69 Normally the demand for money, as measured by the reciprocal of velocity, grows more rapidly than the developing economy. Growth usually brings increasing complexity requiring a larger volume of monetary trans- actions per unit of final output. Quite apart from this effect money is - normally - a superior good and the transactions demand has an income elasticity'exceeding one. These two effects alone, ceteris paribus, imply a falling income velocity. A third variable affecting velocity is possibly of great importance in Afghanistan: monetization of subsistence production. Today perhaps a quarter of output is produced and consumed without monetary transactions. As such production becomes monetized, it in effect absorbs part of the money stock and is of necessity reflected in a decrease in income velocity since the measure of income (GNP) includes subsistence income. 11.70 The combined effect of these three factors implies that price stability in Afghanistan is compatible with rather substantial annual increases in the supply of money. Reinforcing this conclusion is the fact that about four fifths of the stock of money is currency. Thus when the DAB increases the money stock, e.g. lends its newly created money to the central government, there is little of the multiplier effect which occurs in economies where most money is in the form of bank deposits. Concretely, as suggested by Table 60, increasing the money supply some 10 percent to 15 percent annually is usually compatible with long-run price stability in Afghanistan. 11.71 However, we also need to consider other forces acting on velocity, specifically what is often described as the demand for speculative balances. Components of this complex set of forces are also described as the demand for monetary savings or precautionary balances. Presumably some economic units are primarily interested in purchasing or holding Afghanis because of their attractive characteristics compared with other currencies. Foreign exchange "speculators" may have fled, and continue to flee to the Afghani because of its good record vis a vis other currencies. Relevant here is the fact that the Afghani is freely convertible at the bazaar which make its an attractive currency for traders doing business in Afghanistan who would like to escape the exchange controls of their home countries, e.g. India and Pakistan. Appreciation itself induces a furthe'r response in encouraging rapid conver- sion of remittances and other balances which might otherwise have been held in foreign exchange. 11.72 In this context it is noteworthy that although the money-supply grew by over a third in 1976/77, prices only increased somewhere between 3 and - 289 - 8 percent. 1/ It is fashionable to ascribe this paradoxical outcome to a substantial amount of "hoarding" i.e.,saving in the year in the form of simple increase in cash balances associated with good harvests and high levels of remittances. But it is also possible that there was a substantial jump in monetization attendant on good agricultural performance of 1976/77 with a concomitant increase in agricultural marketing. In addition rather than simply savings, speculative demand may have increased greatly. This reason- ing leads to the conclusion that within fairly broad limits the velocity of circulation is both unstable and unpredictable. For example, in Afghan- istan far more than most countries, it is a function of the weather. As a consequence, no matter how well DAB controls the stock of money, there will be - as there have been - substantial fluctuations in the level of prices. 11.73 Turning now to the determinants of the money stock, Table 60 shows foreign exchange reserves, that is row (7) increasing almost in equal step - in absolute terms - with the stock of money. This suggests that growth of these reserves is the principal component of increase in the stock of money. This is clearly the case. Table 57 showed that the growth of other DAB assets (domestic credit of the public and private sectors) was relatively limited. In 1975/76 most growth in money is explainable in terms of the foreign trade surplus. 11.74 In a policy perspective, this discussion underscores the difficulty of the central bank in maintaining price stability. In Afghanistan as else- where in the very long-run it is probably public deficit-induced growth of the money supply which determines price increases. However, in a shorter time period, agricultural production and other variables beyond DAB control - frequently "swamp" the effect of expanded DAB credit and hence money stock. 11.75 Yet as noted, even control of the stock of money has not been completely in DAB's hands. This fact makes clear the need for a mechanism through which Government can exercise some control on the velocity of money. The proposal under consideration in June 1977, to develop a market for gov- ernment securities, could in the long run become such a mechanism. Should government securities become a major financial asset, their purchases and sales by DAB could affect both the quantity of money and its velocity of circulation in desired directions, e.g., offset the expansionary effect of rapid foreign exchange accumulation. But any such developments, of course, lie far in the future. 11.76 In this context, an occurence in 1976/77 bears scrutiny. When proj- ect funding from Iran was not forthcoming as planned, the government substi- tuted central bank financing, increasing its borrowing by Af 3.9 billion 1/ The IBRD price index for Afghanistan, as described in Volume II, stops at the conclusion of 1975/76. Over 1976/77 the Kabul price index increased 3.4 percent. But the index is highly questionable and it is probable that prices increased considerably more. See Volume II. - 290 - as against the budgeted amount of Af 1.2 billion. 1/ As a consequence, the stock of money increased 35 percent, rather than the planned increase of about 18 percent. Normally, even in Afghanistan, such a monetary leap would bring inflation at a dangerous rate. As discussed earlier, for reasons that are not completely clear, there has been little concomitant inflation. Deficit finan- cing on this scale was, however, a risky step to take, although one could argue that the good foreign exchange situation permitted somewhat more adventurous action than prudence normally dictates. Even the 15 percent - 17 percent increase in stock of money foreseen for 1977/78 is pushing close to the danger point. This is not an argument against undertaking development expenditures in the absence of foreign aid however. In the Plan, a great deal of the financing by foreign donors is highly uncertain. As a consequence there is a tendency to turn the central bank into the development lender of last resort. In such a circumstance the Government is faced with a choice between holding up funds for projects and risking high rates of inflation. 11.77 One way to deal with this dilemma would be to undertake detailed multi-year planning which stipulates the limits and uses of central bank loans as well as the distribution of the annual increase among entities, private and public. Planning along these lines would be extremely hazardous inter alia because of the unpredictability of weather, foreign trade, and the behavior of the private economy. Consequently it may be that the current practice of taking a one-year perspective, setting a rough and ready money stock target and revising it if necessary as the year progresses is the best that circumstances permit. Such revisions must however take the potential inflationary impact more into account than hitherto. In general, additional development expenditure should be financed by additional revenue (or reduced expenditure on items such as subsidies) once the prudent limits on credit expansion have been reached. 1/ This includes the official entities. For details see Volume II, Tables 6.1 and 6.2. - 291 - XII. EXTERNAL RESOURCES 12.01 Over the five years 1972/73 to 1976/77 Afghanistan's trade and payments situation has improved steadily. The current account deficit has remained the same in nominal terms, i.e., has declined substantially in real terms, while increasing capital inflows have resulted in foreign exchange reserves rising in each year. As a result, Afghanistan now has US$219 million of reserves, equivalent to 8 months of import payments. In addition there has been a remarkable appreciation in the free market value of the currency, the Afghani. These trends are shown in Table 61 below: Table 61: BALANCE OF PAYMENTS, 1972/73 to 1976/77 (in million US$) Afghan years ending March 20 1972/73 1973/74 1974/75 1975/76 1976/77 /a A. Merchandise Trade Exports (f.o.b.) 124.5 159.1 230.6 235.5 310.0 Imports ( c.i.f.) -157.1 -182.9 -242.5 -277.5 -343.4 B. Other Current Account -5.6 -9.0 -14.0 -12.4 -16.2 C. Net Current Account -38.2 -32.8 -25.9 -54.4 -49.6 D. Loans and Grants 62.0 47.0 40.8 93.6 111.8 Gross Inflow 77.2 69.6 67.4 111.6 129.5 Amortization -15.2 -22.6 -26.6 -18.0 -17.7 E. Net Residual Transactions -21.6 -0.4 10.4 13.6 5.7 F. Additions to Reserves 2.2 13.8 25.3 52.8 67.9 End-year exchange rate (Af equal to one US$) 80.50 60.72 56.58 55.04 47.38 /a Provisional Actual. Source: Da Afghanistan Bank, IMF and Mission Estimates. See Volume II, Table 3.8. 12.02 This trend is surprising for a non-petroleum-exporting country, during the period under review. There are a number of reasons. (a) Perhaps first and foremost, favorable weather conditions in Afghanistan dver a sus- tained period have meant ample harvests and virtually eliminated the need for foodgrain imports. Low, stable wheat prices combined with rising prices for export crops have encouraged farmers to shift land into other crops, par- ticularly cotton. (b) Despite the sharp rise in import prices, Afghanistan experienced a small improvement in the terms of trade during the period. This - 292 - was in part because the price at which Afghanistan sells natural gas to the U.S.S.R. was also adjusted, and natural gas exports exceed petroleum imports. For the rest since Afghanistan exports mainly primary products and imports a large amount of manufactures, the relative price increase for primary pro- ducts during the period proved an advantage. (c) In recent years, capacity has come onstream in the production of fertilizer and cement, which has enabled Afghanistan to substitute for imports of these two major development items. (d) Increased income in Afghanistan and particularly rising money incomes in the export agriculture sector, have gone into the hands of those with low propensities to consume in general and very low propensities to consume imported items in particular. (e) With the 'closing' of Vietnam, various international and national narcotics control agencies have claimed that illegal exports of drugs from Afghanistan have risen sharply. (f) Moving from trade to the capital account, a major factor has been the re-scheduling of sizeable debt service payments to the U.S.S.R. which fell due during the period. (g) Although gross aid disbursements rose in nominal terms, they were at about the level of the early seventies in real terms in 1976/77. The constraints on disbursements were not a function of low aid commitments however. Frame agreements for very large amounts were signed with Iran and the U.S.S.R., and there were promises of substantial assistance from Saudi Arabia, Kuwait and others. As a result the Government avoided the use of its own foreign exchange for projects which might be financed under aid. (h) The post-1973 boom in Iran has resulted in demand for unskilled labor at wage rates which are many times those in Afghanistan. The result has been that perhaps 200,000 or more Afghans have migrated to Iran and the Gulf countries to take up employment. Large amounts have been remitted back to Afghanistan through the informal money bazaar. 12.03 The overall trend in the balance of payments and the trade situa- tion is both gratifying and disturbing. It is gratifying in that some of it represents real increases in production and promising lines of approach for the future, that it has permitted substantial reserve accumulation, and, through the appreciating currency has contributed to stable prices as well. It is disturbing in that much of the trend is accounted for by factors of a special or fortuitous nature which cannot be expected to continue to grow at the same rate in future. The crucial role which the availability of external resources will play in the development of Afghanistan during the Seven-Year Plan period requires a careful review of the emerging constraints so that actions can be taken to insure a continuation of present trends. A. Exports 12.04 Export growth in recent years (i.e. 1972/73 to 1976/77) has been little short of spectacular. Aggregate value increased by about 149 percent over this period and about one-third of the increase was due to increase in volume as shown in Table 62 below: - 293 - Table 62: EXPORT FLOWS AND PRICE TRENDS (1972/73 100) Indices 1973/74 1974/75 1975/76 1976/77 Export Flows 127.8 185.2 189.2 249.0 Export Prices 140.5 141.1 142.1 172.9 Export Volumes 90.8 131.3 133.7 144.0 Source: See Volume II, Tables 3.1, 3.5, 3.6 and 3.14. Part of the increase in volume reflected the recovery of the economy from the drought years (1970/71 and 1971/72) and the severe winter of 1972. But a good part of the increase was also due to a shift in the pattern of agricultural production and a consequent increase in the share of high valued export items in aggregate agricultural output. 12.05 Afghanistan's exports are dominated by agricultural products. Apart from natural gas, all the major exports are either directly agricultural or agriculture based. This is shown in Table 63 below: Table 63: PRODUCT COMPOSITION AND PRICE TRENDS OF EXPORTS (in percentages) Composition Change in Volume, Change in Prices, 1972/73 1976/77 1972/73-1976/77 1972/73-1976/77 Dried Fruits and Nuts 24.4 24.0 17.9 72.4 Fresh Fruits 8.6 8.7 57.5 52.9 Ginned Cotton 8.9 22.0 152.2 103.7 Karakul 12.9 7.3 -8.0 42.1 Carpets and Rugs 8.7 7.8 19.0 181.0 Natural Gas 13.7 11.7 -21.1 160.3 Others 22.8 18.5 - - Source: As for Table 62. There have been significant shifts in the relative importance of particular agricultural exports. The most dramatic change has been the increase in ex- ports of ginned cotton; the contributory factors being a trebling of domestic seed cotton production and a doubling of export prices. Most of the increased output however, did not come from higher yields but from shifting land out of wheat into cotton at the favorable relative prices which prevailed over much of the period.. The shares of fresh and dried fruits and nuts remained vir- tually the same. The agricultural production data suggest that the total output of fruits and nuts during the last decade has grown by less than I percent per annum, again mostly through new areas planted with very little improvement in yield. These data must be open to question however given the steady increase in export volumes over the past four years. There has been - 294 - a substantial decline in the relative importance of karakul exports. The number of karakul pelts exported has actually declined over the period in the face of sluggish international demand and depressed supplies following the severe droughts of 1970-1972. In addition there has been some shift from karakul into illegal exports of lambs and sheep in response to high meat prices in Iran. As for carpet and rugs, export earnings have trebled. The increase has been however mainly on account of higher prices because production is not amenable to rapid increases in the short-term given the special skills which are required. Finally natural gas exports have been limited by the Government in order to conserve the limited gas reserves for more productive uses such as fertilizer, power and possibly steel production in the future. The category of "other exports" includes wool, hides and skins, handicrafts and cement. 12.06 The Plan projects the aggregate export flow to increase, (in 1975/76 prices) from $236 million in 1975/76 to $393 million in 1982/83, the final year of the Plan. This represents an annual compound rate of growth of slightly less than 8 percent. Viewed in relation to the projected GNP annual growth rate of 6 percent, exports emerge as a leading sector in the Plan. Viewed in relation to the real rate of growth of exports in the previous seven-year period (i.e. 1969/70-1975/76) of 17 percent per annum however, the projected growth rate appears conservative. This conservatism would seem to reflect capacity constraints on the production of a number of export items. The Plan projection, broken down by commodities is shown in Table 64 below: Table 64: COMMODITY COMPOSITION OF AFGHANISTAN'S CURRENT & PROJECTED EXPORTS (million US$ in constant 1975/76 prices) 1975/76 1982/83 Commodities Values Share Values Share Increase in % Natural Gas 46.3 19.6 51.5 .13.1 11.2 Fresh Fruits 20.1 8.5 48.4 12.3 140.8 Dried Fruits, Nuts 54.7 23.2 60.9 15.5 11.3 Karakul 10.4 4.4 18.5 4.7 77.9 Ginned Cotton 35.3 15.0 99.2 25.2 181.0 Carpets and Rugs 16.1 6.8 26.0 6.6 61.5 Cement 1.2 0.5 19.5 5.0 - Others 51.4 22.0 69.5 17.6 35.2 235.5 100.0 393.5 100.0 67.1 Source: 1975/76 data, see Volume II, Table 3.1 1982/83 projections, see the Plan, Volume II, pp. 15-17. 12.07 Ginned Cotton accounts for 40 percent of the total projected in- crease in exports. The Plan is predicated on an increase of about 69 percent. in area under cultivation and a 30 percent improvement in yields per hectare. This would leave some surplus to be absorbed in domestic textile production. These are ambitious programs. Two factors are working against further shifts - 295 - of irrigated land from wheat to cotton. First the major irrigation projects are not projected to come on stream until close to the end of the present Plan period or well into the next. How far farmers will be prepared to shift existing land from wheat into cotton depends on relative prices, but it also depends on the year-to-year stability of the wheat price. Since family food needs must be satisfied first, many smaller farmers will be unwilling to shift acreage out of wheat without the assurance that in poor harvest years, their earnings from cotton will enable them to purchase adequate wheat supplies. The second problem relates to yield improvements. There has been little or no yield improvement in the past few years, and achieving the ambitious targets above will need an expansion and improvement in research and extension efforts of which there is no sign at present. In these circumstances, while the Government's ambitious targets for ginned cotton production during the Plan period are a recognition of the priority which must attach to cotton output, it would seem wise to plan on the slightly more conservative assumptions which have been detailed in Chapter IV, Table 19. Assuming a 7.5 percent annual increase in the area under cultivation and a 3.2 percent annual increase in productivity per hectare, the volume of seed cotton would be just under 300,000 tons in 1982/83 compared to 350,000 tons projected in the Plan. The Plan projects domestic textile production to more than double to 159 million meters. This ambitious target would result in a very high degree of absorp- tion of ginned cotton in the home market. A more realistic projection of 100 million meters, a 40 percent increase, would mean that ginned cotton exports could still be above Plan targets, (see Table 65 below). 12.08 While it is useful to make specific comparisons with the Plan, this should not be interpreted as a judgment that the cotton development programs are of any less significance to Afghanistan over the longer term. There are good prospects for cotton cultivation in Herat and Farah provinces in the west, depending upon the increase in irrigated acreage through the Hari Rud and Farah Rud barrages, currently scheduled for completion by the end of the Plan period but more likely by the mid-1980's. This area also has excellent potential for sugar beet and vegetables however and the precise cropping patterns will depend on price relationships and yields when these schemes are operational. For purposes of the projections we have assumed that the major increase is in cotton, but shifts to other commodities if economic, would have an equal or more favorable impact on the balance of payments. Prospects for increased cotton production in the Kokcha river area in the north are also good. This irrigation project is scheduled for completion by the end of the plan period. Finally the prospects in the Helmand region are dependent on more irrigation by building additional reservoir capacity at Kajakai currently scheduled for 1981/82. In addition, programs to stabilize wheat prices and increase domestic wheat production, should instil greater confidence in the farmers to increase their output of potentially more profitable cash crops. Given these changes, there should be no problem in reaching the Seven-Year Plan production targets by 1985/86. The likely output at that time is shown in Table 65 below: - 296 - Table 65: PROJECTIONS FOR COTTON PRODUCTION, CONSUMPTION AND EXPORT, 1985/86 1975/76 1985/86 Irrigated Land 112,000 hectares 200,000 hectares Production 57,600 tons* 144,000 tons* Mill Consumption 14,700 tons* 44,900 tons* Exports 36,900 tons* 99,100 tons* Changes in Stocks 6,000 tons* - * Ginned cotton equivalent of seed cotton. Source: The Plan (p. 82), and IBRD estimates. 12.09 The prospects in the world market are unlikely to prove a con- straint. The rate of growth in world cotton consumption is expected to be about 2.8 percent per annum till the mid-1980's. While imports are expected to grow by about 3.5 percent per annum on average in the period, this consists of rapid growth till 1980 and rather slow growth thereafter. Afghanistan's. 1975/76 market share in world imports of cotton is less than 1 percent. The maintenance of this market share would permit exports to increase by an average of only 2.4 percent per annum while Afghanistan's export surplus is expected to increase by about 10.8 percent per annum. It is unlikely, however, that there will be problems of disposal in the export market since the market share with the projected 1985/86 volume of exports would rise to only about 2.1 percent. This seems consistent with Afghanistan's demonstrated comparative advantage in cotton production. At 1975/76 market prices, the 1985/86 pro- jected volume of export would amount to about $95.0 million. The increase~ in prices is, however, expected to be substantial, about 130 percent during the entire period so that the 1985/86 export earnings from cotton could be about $219 million compared to about $35 million in 1975/76. 12.10 Like ginned cotton, the Plan targets for fruits and nuts are ambi- tious. As mentioned earlier, the growth rate of total output during the last decade has been less than 1 percent per annum, mostly through new areas planted with very little improvement in yield. This rate will only increase slowly in the medium-term because of the long gestation period for new plant- ings, and constraints like access to irrigation water, slow changes in plant husbandry practices, and inadequate extension services. Even this slow growth in the volume of production may not be reflected in rising export volume how- ever, since domestic consumption is likely to rise with income growth. Export volume may thus increase at a slow rate during the Plan period, perhaps less than 1 percent a year. (The Plan projection is for export volume to grow by 7.5 percent a year.) However, once again considerable increase in domestic production and exports should be expected by the mid-1980s when the newly planted vineyards and orchards begin to produce. On the demand side, Afghanistan can easily expect to sustain the projected increases well into the mid-1980s since the major competing suppliers, California and Greece, are not expected to retain their current market shares. - 297 - 12.11 Export possibilities for karakul are limited by the improving pros- pects for meat exports. The increase in size of karakul flocks will thus be constrained by the need to allow the lambs to grow beyond the stage at which the skins can be used for karakul, and there are already signs of this. The major burden of increase in exports will have to fall on quality improvements so as to raise the earnings per pelt. Improved animal husbandry practices will be critical for this effort. There are good prospects for this in the Herat Region with the construction of Sheep Improvement Centers which could be replicated in the northwest (Badghis, Faryab, Balkh, Jawzjan and Samangan provinces) and the southwest (Kandahar, Farah and Helmand provinces). 12.12 The Plan probably underestimates the potential volume of meat exports, and their enormous long-term potential. Meat exports are projected at only 6,000 tons in 1982/83, presumably from the Herat slaughterhouse which begins to operate in 1978. Export possibilities from a proposed Ghazni slaughterhouse do not seem to have been taken into consideration. This proj- ect is scheduled for completion in 1979/80. Like the Herat slaughterhouse, its entire produce could be exported to the Iranian market where Afghan meat, currently available only as smuggled produce, sells at a premium compared to imports from competing suppliers. Demand will not pose a constraint since Iran's consumption of mutton in 1980 is expected to increase by 40 percent from its 1975 level of 350,000 tons and will further double between 1980 and 1985. Iran's incremental domestic production is likely to cover only about 10 percent of this increase. This is shown in Table 66 below: Table 66: PROJECTED PRODUCTION, CONSUMPTION, AND IMPORT OF MUTTON IN THE NEAR EAST, ('000 tons) Production Consumption Import Gap 1980 1985 1980 1985 1980 1985 Iran 242 294 492 960 250 666 Other Gulf Countries 30 27 127 208 97 181 Others 939 1,164 966 1,329 29 165 Total Near East 1,211 1,485 1,585 2,497 376 1,012 Source: IBRD projections. 12.13 Afghanistan has advantages of consumer preference and location in exploiting these potential markets. Australia currently has a near monopoly in the Iranian market. To exploit Afghanistan's obvious potential a major increase in pasture development and disease control, significantly greater than envisaged in the Plan, will be necessary. As an order of magnitude, a mere 10 percent of the 1985 Iran market could at 1975/76 prices add about US$130 million to Afghanistan's export earnings. This would, by itself, necessitate the number of sheep rising from the current herd of about 10.2 million (excluding karakul sheep) to about 12.9 million, a rate of increase of about 2.4 percent per annum. This is well within the limits of domestic production possibilities even when adjusted for incremental domestic con- sumption. According to the admittedly unreliable data, there were about 15 - 298 - million sheep in 1969/70 prior to the droughts and the severe 1972 winter; the attainment of such levels during the next eight years is feasible but will require major investments and effective implementation of pasture improvement and disease control programs. 12.14 The recorded export volume of carpets and rugs declined slightly after 1972/73 but recovered to record levels in 1976/77. Since a good deal of the production is illegally exported to Iran, the above secular trend may not be indicative of the trend in production. However, as there are no reliable statistics, 1/ no definitive statements can be made about the produc- tion trend. But some qualitative statement% can be made about the potential. Carpets are entirely hand-woven by women and children. A basic constraint is therefore imposed by the likely increase in this segment of the population. Although there could be a secular rise in the overall participation rate, the same cannot be expected in house-bound occupations such as carpet weaving. With the spread of educational facilities a reduction in the number of children engaged in carpet weaving is likely. Since the carpets are hand-woven, the prospect for the use of looms is also limited without destroying their tradi- tional character and value. The possible stabilization in the production of carpets contrasts with a 62 percent rise in export volumes projected in the Plan (the expected growth in population and labor force is about 16 percent over the Plan period). This projection becomes even more tenuous when higher domestic consumption with rising incomes is taken into account. 12.15 The reason for the increase in cement exports projected in the Plan (see Table 64) is the scheduled completion of two new cement plants, at Herat and Kandahar, in 1979. The progress in implementation thus far, however, implies a substantial rescheduling with the Herat plant to be completed by 1982/83 and the Kandahar plant likely to be completed later or even deferred entirely to the next Seven-Year Plan period. Domestic consumption, on the other hand, can be expected to rise from the 1975/76 level of about 130,000 tons to about 340,000 tons in 1982/83 (see para 6.27). The combined existing and likely incremental production capacity could be about 370,000 tons by 1982/83 so that a small surplus, about 30,000 tons, is conceivable. Meanwhile, prior to 1982/83, a rapidly expanding volume of imports will be necessary. The aggregate volume of imports over the Plan period is estimated to be about 400,000 tons. As for the years subsequent to the present plan period (i.e., post 1982/83), further rapid growth in consumption can be projected. However, output from the Kandahar cement plant is likely to be available by the mid- 1980's and despite increased domestic consumption, large exportable surpluses would be available till 1990. The prospects for such exports over the longer term are dependent on the availability of markets.' Because of the heavy transport costs, Afghanistan's cement exports would be limited to Iran and Pakistan as potential markets. There will be a need to arrive at mutual agreements on production capacities. The likelihood is that by 1980 Iran will have a production capacity of about 20 million tons and may even have a small export surplus. 2/ Consumption, however, will rapidly increase in the 1980s 1/ The production is dispersed among thousands of small family enterprises. 2/ Iran's Fifth Development Plan: A Revised Summary, Part III, Chapter 3. - 299 - and there could be a possibility of meeting part of the incremental demand from Afghanistan. As for Pakistan, currently a net importer of about 100,000 tons, plans are also for a small exportable surplus in the early 1980s. 1/ Rising consumption demand would, however, necessitate incremental production capacity by mid-1980s. The prospects for cement export would seem therefore to be entirely dependent on government-to-government agreements as to the role which Afghanistan's production might play in serving the neighboring markets. 12.16 As noted earlier, exports of natural gas are projected to increase only marginally over the Plan period and are indeed projected to decline until 1980/81 when the second field at Jaraqdaq comes on stream. Export earnings during the Plan period will depend on timely completion of the desulphuriza- tion plant and the well facilities at Jaraqdaq. The Plan emphasizes the conservation of Afghanistan's natural gas for use in domestic fertilizer and energy production. There is a need to examine whether this approach is appropriate given the available reserves and alternative energy sources. 12.17 Among the possible new export items, copper must be regarded as the biggest prospect. Its potential lies beyond the Plan period, probably in the mid-1980s based on an optimistic view of the current project cycle. Construc- tion of smelter for about 0.15 million tons of refined metal, by the mid-1980s, could give Afghanistan about 2 percent of the world's projected import demand in 1985. While in terms of market share this is inconsequential, earnings from this could be about $230 million at 1975/76 prices. Marketing is unlikely to be a problem. Despite the current world-wide overcapacity due to recession, the outlook for copper is better over the longer run. World production and consumption are expected to increase by about 3 percent per annum during 1976-85. This is shown in Table 67 below. Table 67: WORLD PRODUCTION, CONSUMPTION AND IMPORT OF REFINED COPPER ('000 tons) 1976 1980 1985 Production 8,790 10,900 12,500 Consumption 8,600 10,280 12,250 Imports 4,463 5,800 6,900 Source: IBRD projections. World imports are also expected to make a steady recovery well into the 1980s, although they will decelerate after 1980. Despite the slow increase in imports expected in the 1980s, the incremental import demand of about 11 percent over the 1980/85 period is not inconsequential and offers reasonable prospects for Afghanistan. 12.18 Another major potential is the development of vegetable exports. At present, with one exception, there is a ban on vegetable exports which has 1/ Six-Year Development Plan, 1978-83, Government of Pakistan. - 300 - caused a very slow rate of growth in production. The exception is the newly created Afghan Vegetable Export Corporation (AVEC) which has been given.an export quota. The completion of major irrigation projects particularly in the western region could lead to a considerable increase in production and export. The principal market is Iran which currently imports large quantities of pota- toes and onions. In view of the expected high rates of growth in Iran and the gulf countries, demand is likely to prove ample. At 1975/76 prices, the projected 1985/86 export volume could be worth as much as $45 million. 12.19 Finally, it is necessary to cast the revised export quantity projec- tions in terms of current prices to indicate their actual balance of payments impact. I0RD price forecasts have been used for this. However, since many of Afghanistan's exportables do not figure in these price forecasts, the expedient of using prices for similar commodities as surrogates has been followed. Thus for projecting the foreign exchange earnings from natural gas, the price fore- cast for petroleum has been followed, while for fresh and dried fruits, the forecast for oranges and tangerines has been used; for karakul, carpets, cement and the miscellaneous category, the GNP deflator for the developed countries has been used. Actual 1975/76 prices for all commodities have been used as benchmark prices for the purpose of projection in terms of current prices. 12.20 The revised export projections in current prices are shown in Table 68 below. Table 68: PROJECTED EXPORT FLOWS BY PRINCIPAL COMMODITIES AT CURRENT PRICES (US$ million) 1975/76 1982/83 Value % Value % Fruits and Nuts 76.7 30.9 175.5 26.2 Karakul 10.4 4.2 37.2 5.5 Cotton 35.3 14.2 141.4 21.1 Carpets and Rugs 16.1 6.5 41.8 6.2 Natural Gas 46.3 18.6 81.5 12.2 Meat - - 65.4 9.8 Other Goods 50.7 20.4 100.9 15.0 Non-Factor Services 13.0 5.2 26.7 4.0 Total 248.5 100.0 670.5 100.0 Note: Total for 1975/76 differs from figures in Table 64 due to inclusion here of Non-Factor Services. Source: IBRD projections. The annual compound growth rate is thus about 15 percent of which the volume effect is about 4 percent so that, on average, the export prices are expected to improve annually by about 11 percent. This would reflect an improvement in Afghanistan's terms of trade during the period, since import prices may grow at about 7.5 percent per annum. Secondly, the rankings of principal export - 301 - earners will alter, although fruits and nuts retain their ranking as the lead- ing sector due to a very rapid rate of price increase (12 percent). Cotton would emerge as the next leading sector followed by natural gas. The decline in the rank of natural gas reflects the Government's plans for conservation of this asset and its ultimate use for downstream items like chemical fertilizer with higher payoff in value added. The projected annual growth rate for natural gas of about 9 percent is mostly accounted for by the expected price increase. 12.21 Although an expansion in export volume of 4 percent per annum is not particularly impressive, the prospects beyond the end of Plan period are ex- cellent. In the longer term, Afghanistan is beautifully placed to meet the growing demland in the rich markets of the oil producing countries for meat, fruits and vegetables. If current programs prove successful, the shift from wheat to high value cash crops such as these should accelerate in the mid- 1980s. Rising production of these commodities would benefit the vast majority of Afghanistan's rural population and result in an expanded market for urban manufacturers as well. Given sensible economic policies, agricultural exports have the potential to act as the leading sector in what should prove to be rapid growth of the Afghan economy ten years from now. B. Imports 12.22 While Afghanistan's imports did not grow quite as fast as its exports, the increase between 1972/73 and 1976/77 was still quite rapid, at 8 percent a year on average in real terms, with a jump of 23 percent in the last year alone. The composition of imports in the past has tended to be very much influenced by the size of the wheat crop and whether, as a consequence, foodgrain imports were needed. The last significant wheat imports took place in 1972/73. The structure of imports is shown in Table 69 below. - 302 - Table 69: PRODUCT COMPOSITION OF IMPORTS /a (in percentage shares) 1972/73 1975/76 A. Consumer Goods Wheat 12.2 0.4 Sugar 7.3 13.0 Tea 6.1 10.7 Edible oil 3.5 3.5 Other Foods 1.8 3.7 Textiles /b 11.7 20.2 Other Consumer 8.7 10.6 manufacturers excluding durables B. Intermediate Goods Petroleum and Lubricants 6.1 9.2 Fertilizer 3.6 Chemicals 5.5 2.8 C. Capital Goods 8.3 8.5 D. Misc. Manufacturers /c 27.0 17.4 Total 100.0 100.0 /a Official imports only. /b Mostly fabrics, some rayon yarn. Tc Comprises mostly capital goods received under foreign aid, and consumer durables. Source: See Volume II, Table 3.2. Despite the virtual absence of foodgrain imports in the recent past (there will however be imports in 1977/78 due to the poor harvest), consumer goods have risen as a proportion of total imports and formed no less than 62 percent in 1975/76. This is in part due to the successful import substitution in fertilizer and cement production, but also points up the lack of success of the program for import substitution in textiles. 12.23 According to the Plan, commodity imports are projected to increase in constant prices, from $273 million in 1976/77 to $351 million in 1982/83, the total for the Plan period being $2,058 million. The annual compound rate of growth is about 4.4 percent which when compared to the projected GNP annual growth rate of 6 percent yields an import elasticity of about .75. The ratio is significantly understated however, since the Plan import figure excludes - 303 - imports of capital goods procured under aid (estimated project aid inflow is about $2.5 billion during the Plan period) which are projected to rise rapidly. The true import elasticity is thus considerably higher. The Plan's import figure of $2,058 million. thus, for all practical purposes refers only to con- sumer and intermediate goods, the share of capital goods being only about 12 percent. Obviously if capital goods under aid were included, the proportion would be far higher. The real annual growth rate for imports (as defined above) during 1972/73 to 1975/76 was about 13 percent. Compared to this the projected real growth rate of imports in the Plan of about 4 percent is extremely low. This radical change reflects the import substitution strategy which is central to the Plan. 12.24 The share of individual commodities in the growth of imports provides an interesting indication of the Plan strategy. This is shown in Table 70 below. Table 70: PERCENTAGE SHARES OF PRINCIPAL CONSUMER AND INTERMEDIATE GOODS IMPORTS IN TOTAL IMPORTS, 1975/76 - 1982/83 Commodities 1975/76 1982/83 Sugar 7.5 3.0 Tea 10.8 10.0 Textiles (Cotton) 10.0 _ Petroleum Products 11.3 14.6 Tires and Tubes 5.5 6.0 Fertilizer - 14.0 Cotton Yarn 4.0 4.0 Others 50.9 48.4 Source: The Plan. The projected reduction in the imports of sugar and textiles is to be achieved through a major expansion of capacity in these sectors over the Plan period. The projected real rates of growth in the domestic production being 350 per- cent and 145 percent respectively. Imports of tea, for which there is no domestic production are expected to grow at 2.5 percent per annum, roughly in line with the presumed per capita income growth of about 4 percent and an income elasticity of about 0.6. Imports of petroleum products are expected to increase at around 7.5 percent, slightly higher than the growth rate of aggregate income. 12.25 Two major questions arise in connection with the Plan's import tar- gets. First, no provision has been made for imports of foodgrains. In the context of the need to achieve food security this seems unwise. As demon- strated in Table 19 of Chapter IV, Afghanistan could derive substantial net benefits by following a strategy which allows modest displacement of wheat acreage by cotton. Over the Plan period, the necessary imports of wheat could - 304 - easily be paid for by increased cotton exports with net earnings of $107 mil- *lion in current prices. The aggregate import projection has thus been adjusted to reflect imports of 145,000 tons in 1977/78 (because of drought), 60,000 tons in 1978/79, rising to 107,000 tons in 1982/83. Second, the Plan depends on ambitious targets for the implementation of major import substituting proj- ects, notably textiles and sugar. It would seem wise to take a conservative view of the likely achievement (see Chapter IV and Chapter VI). The overall additional import provision for these two adjustments comes to about 9 percent over the Plan's import projection. 12.26 What is the likely profile of the imports to be financed by foreign aid? The point of departure is the Plan's expected aid inflow of about $2.8 billion. Of this amount around 10 percent is expected to be the service com- ponent of project aid (technical assistance etc.). Thus about $2.5 billion is available for merchandise imports. Of this amount about $260 million is expected to be disbursed against local currency and thus be available for financing non-project imports. The crucial question, however, is whether a disbursement of $2.8 billion is probable. The highest annual gross aid flow recorded in recent years was about $130 million in 1976/77. With that as a base, an annual rate of acceleration of around 35 percent will be necessary for the aggregate sum of $2.8 billion to be disbursed. To project such a pace of acceleration would be unrealistic in the light of what is known of the capacity to prepare and implement projects. Only about half the projected aid sum of $2.8 billion is firmly committed, and that too, mainly in the form of frame agreements without firm project implementation schedules. 12.27 Donor support is largely dependent on the success with which pres- ent and future projects are implemented. Unquestionably, there has been some improvement in absorptive capacity. During the 1970s development expenditures have risen by around 12 percent per annum (in current prices) although the year-to-year variations have been significant. It is plausible that some further improvement should be expected. Assuming that during the Plan period, the average rate would rise to around 15 percent per annum a level of import expenditures under aid can be projected keeping the current import intensity of development expenditures constant. On this basis, the gross aid disburse- ments would amount to about $1.6 billion. Adjusting for amortization of about $370 million, leaves net disbursement of $1.23 billion. 12.28 Import flows during the Plan period can now be projected at current prices. These are shown in Table 71 below. - 305 - Table 71: PROJECTED IMPORT FLOWS BY PRINCIPAL COMMODITY AT CURRENT PRICES (US$ Million) 1975/76 1982/83 1976/77-1982/83 (Total) Value % Value % Value % Foodgrains and Sugar 37.2 13.4 64.4 6.3 296.7 6.7 Other Consumer Goods 125.8 45.3 171.9 16.8 1,165.7 26.2 Petroleum and Petroleum Products 25.2 9.2 85.1 8.3 366.7 8.2 Intermediate Goods 21.6 7.8 257.2 25.1 964.9 21.6 Capital Goods 67.7 24.3 447.8 43.6 1,663.0 37.3 277.5 100.0 1026.4 100.0 4,457.0 100.0 Source: IBRD projections. The projection reflects the import substitution strategy of the Plan. Thus the share of all consumer goods goes down from about 59 percent in 1975/76 to about 23 percent in 1982/83. Principally, this would happen through a major program of import substitution in textiles; no increase over the 1975/76 import level of about $40 million or about 20 million meters is anticipated. On the other hand, imports of intermediate goods will rise substantially to provide inputs into import substituting industries and the expected acceleration in the import of DAP fertilizer which is not produced locally. Some imports of urea fertilizer are also built into the projection since consumption is expected to exceed domestic production by 1980 and the second urea fertilizer plant does not come on stream till the mid-1980s. Finally, capital goods expenditures are expected to accelerate very rapidly even with only partial fulfillment of the Plan targets. C. Terms-of-Trade 12.29 Afghanistan's terms of trade are expected to improve substantially over the 1975/76 base (though they would remain virtually unchanged if 1976/77 is taken as a base). This is shown in Table 72 below. Table 72: TERMS-OF-TRADE INDEX Export Prices Import Prices Terms-of-Trade 1975/76 100.0 100.0 100.0 1976/77 121.5 99.1 122.6 1977/78 130.2 101.9 127.8 1978/79 139.1 112.5 123.6 1979/80 151.5 121.2 125.0 1980/81 163.1 134.7 121.1 1981/82 175.3 142.9 122.7 1982/83 190.6 154.3 123.5 Source: IBRD projections. -306- While export prices are expected to increase by about 11 percent annually, import prices could increase by about 6 percent. Among the exports, the highest annual rates of prices increase are expected to be in meat (13.7 per- cent), fruits and nuts (11.9 percent), Karakul (9.7 percent), and cotton (7.9 percent). On the imports side the expected annual rates of price increase are within a range of 6 to 8 percent for most of the major categories. D. The Balance of Payments 12.30 As explained earlier, Afghanistan's chronic current account deficit has been declining in real terms in recent years. Moreover it has been turned into an impressive reserve accumulation by increasing capital inflows. The reader is referred again to paras. 12.01 and 12.02. The two important compo- nents of Afghanistan's capital account are net aid and remittances. 12.31 With regard to the trend in aid both gross and net aid inflows fell in 1973/74 and 974/75, but accelerated considerably in the subsequent'two years. This is shown in Table 73 below. Table 73: GROSS AND NET FOREIGN AID INFLOWS (In million US$) 1972/73 1973/74 1974/75 1975/76 1976/77 Gross Aid 77.2 69.6 67.4 111.5 129.5 Debt Service 23.4 32.2 37.1 23.2 26.9 Principal (15.2) (22.6) (26.6) (18.0) (17.7) Interest (8.2) (9.6) (10.5) (5.2) (9.2) Net Aid 53.8 37.4 30.3 88.3 102.6 Source: IBRD estimates based on Ministry of Finance reports. The fall in the gross aid inflows during 1973/74 and 1974/75 reflects the uncertainties following the 1973 coup; its subsequent recovery in nominal terms attests to the improvement in the administrative and technical capacity to absorb somewhat larger volumes of foreign aid. Even more important than the rising gross foreign aid, has been the massive rescheduling of the USSR debt after 1972. In 1972 an agreement was reached with the USSR to reschedule about $30 million of some $152 million in debt service obligations due during the period 1972/73 to 1976/77. This was succeeded by another agreement in 1973 to convert some $17 million in loan commitments into grants and finally in 1975, another $136 million in debt service obligations originally due during 1975-80 was rescheduled. 12.32 There has also been a large inflow of remittances from workers in Iran and the Gulf countries. The exact size of this item is unknown since the inflow takes place through the money bazaar whose transactions are not recorded officially. Orders of magnitude of between $100 million and $200 million are the usual guesses. The volume of remittances has probably been the leading factor in the appreciation of the Afghani. The official balance- of-payments, however, records a proxy in the form of net residual transactions which is merely indicative. This item refers both to the central bank's - 307 - purchases of foreign currency in the money bazaar and, since it is a residual in the balance-of-payments, to errors and omissions. Total central bank purchases from the money bazaar were about $20 million during 1975/76. This amount is, however, merely the tip of the iceberg which could be tapped to meet the country's payments needs subject to such major considerations as the effect on domestic money supply and the appropriate exchange rate. 12.33 There has been minimal exploitation of Afghanistan's undoubted tourism potential. Earnings from tourism in 1976/77 were only about $13 million, barely 4 percent of total current account receipts. In real terms, this marks hardly any increase over the previous year's total of about $12 million. The proximate cause is of course, the stagnation in the number of tourist arrivals shown in Table 74 below. Table 74: NUMBER OF TOURIST ARRIVALS BY LAND AND AIR Land Air Total 1973/74 68,931 22,731 91,662 1974/75 78,327 17,895 96,222 1975/76 70,291 20,842 91,133 1976/77 67,615 23,365 90,980 Source: Afghan Tourist Organization. There are two basic causative factors that could be identified. First, the massive exchange rate appreciation since 1972/73 has been a minor deterrent. Second and more important, lack of amenities and poor organization have deterred all but the most adventurous of tourists. Afghanistan has only one hotel of international standard (four- or five-star) and none at or in close proximity to some of the major tourist sites. Domestic transportation facili- ties, both land and air, are inadequate in volume and indifferent in service frequency and quality. The Afghan Tourist Organization, a public sector body, along with its commercial subsidiary, Afghantour, virtually monopolizes all group tourist arrivals, and has so far been unable to exploit the undoubted growth potential in this area. The necessary policy requirements and insti- tutional changes have been identified in a recent sector survey by the Bank.l/ The prospects for tourism development in Afghanistan over the current Seven Year Plan period are, however, limited. Keeping in mind the gestation lag in undertaking necessary investments and implementing the recommended policy and organizational changes, a 2.5 percent annual real rate of growth has been projected for tourism receipts. In current price terms, this amounts to an annual growth rate of about 10 percent, slightly higher than experienced during the last three years. 12.34 The Plan contains a summary balance of payments statement prepared on the same constant price assumptions as underlie the trade flow projections. The presentation is somewhat abridged as it does not refer to aid-financed 1/ Afghanistan: Tourism Sector Review (Report No. 1698-AF), pp. 13-16. - 308 - imports and therefore, the concomitant inflow of aid disbursements. Amorti- zation payments for past debt are, however included. The Plan's balance of payments therefore really refers only to parts of the current and capital accounts. Total debt service payments are estimated at $301 million. To meet this, a trade surplus of $126 million is projected and added to net non-factor services of $153 million. The result is an overall deficit of about $22 million over the Plan period. This estimate is not of much use. A more realistic projection would be vastly different because trade flows would be translated into current prices, aided imports included in the cur- rent account and counterpart financing in the capital account, and a substan- tial net residual transactions item would be included in the capital account to reflect the likely foreign exchange surplus in the 'bazaar'. 12.35 The Plan estimates a total aid flow of around $2.8 billion of which $2.5 billion is in the form of project aid. Of the $2.8 billion of total and the principal donors are expected to be Iran (41 percent), other OPEC members (17 percent), USSR (13 percent), other Communist Bloc countries (4 percent), IDA (4 percent), and Asian Development Bank (3 percent). Disbursements from USA relative to other donors are expected to taper off while USSR is expected to be replaced by Iran as the major donor. The share of grants in the total is extremely low (2 percent) which has obvious implications for the future debt burden. 12.36 A significant part of the projected aid sum is in the form of frame protocols, against which projects have to be separately committed at a later stage. These are often without a time-frame and in most cases the Plan has projected the use of funds against these agreements on rather shaky grounds. For example, the amount shown against Iran is $1.3 billion. To date, the firm commitment from Iran stands at only $700 million in the form of a frame protocol. Projects agreements actually signed by end 1977 amounted to $53 million of which about $23 million had been disbursed. The residual commitments will depend, inter alia, on the techno-economic feasibility of two very large-scale capital projects, viz., railway and iron ore/steel complex. Similarly, of the $640 million earmarked for USSR, about $400 million is firm but in the form of a frame protocol signed in 1975. The other donors are prepared to enter only into annual or project specific commitments so that the amounts earmarked for them are speculative, and. even seem unrealistically low in the case of IDA and the USA for example. 12.37 The projection of aid is of primary importance in attempting to put together a realistic balance of payments picture for Afghanistan over the Plan period. The Plan is based on the proposition that the foreign exchange needs of all development activities will be financed by aid. If the aid does not come in, then the project does not go ahead and both sides of the balance of payments are reduced by an equivalent amount. This is a strategy which leaves the investment program to be determined by the good sense or the political interests of foreign aid donors. It is not an acceptable way for Afghanistan to conduct either its planning or its investment in the longer-term. Priori- ties need to be defined and investment should go ahead according to those priorities limited by total foreign exchange availabilities in the longer-run and not by aid commitments for specific projects. In Table 75 below, we have attempted to define separately import needs and aid flows. - 309 - Table 75: SUMMARY BALANCE-OF-PAYMENTS PROJECTION, 1976/77-1982/83 (US$ millions current prices) 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 A. Merchandise Trade Exports (f.o.b.) and NFS 325.0 361.2 408.2 456.2 518.8 600.3 670.5 Imports (c.i.f.) and NFS -347.4 -436.8 -495.5 -597.0 -713.2 -822.0 -1037.4 B. Other Services and Transfers (Net) - 27.2 - 28.5 - 29.5 - 33.8 - 38.5 - 46.0 - 59.8 C. Net Current Account - 49.6 -104.1 -116.8 -174.6 -232.9 -267.7 -426.7 D. Transfers and Non- Monetary Capital 111.8 138.8 118.5 144.2 199.0 218.8 299.3 Official Loans and Grants 129.5 160.2 155.4 184.9 243.2 305.2 420.8 Amortization -17.7 -21.4 -36.9 -40.7 -44.2 -86.4 -121.5 E. Net Residual Transactions 5.7 10.0 15.0 25.0 30.0 35.0 50.4 F. Increases in Reserves (-) -67.9 -35.7 -16.7 +5.4 +3.9 +13.9 +77.0 Source: IBRD estimates. The result is quite different from the Plan. In terms of current prices, as compared to the Plan, the import bill in Table 75 is about 28 percent ($1.4 billion) less. Even this lower figure will be extremely difficult to achieve. As the Plan goes ahead, external assistance is likely to replace implementa- tion capacity as the effective constraint. Aid flows are likely to fall substantially short of the investment program which Afghanistan can and should undertake in the 1980s. 12.38 The estimates of imports and gross aid in Table 74 are the basis for deriving debt service payments which have been incorporated in the same Table. Even with the proposed reduction in the investment program, and thus import levels, debt service payments (i.e. both amortization and interest) are expected to increase from about $26.9 million to about $157.9 million in 1982/83. This is shown in Table 76 below: - 310 - Table 76: DEBT SERVICE PAYMENTS (US$ millions) Interest Amortization Total Debt-Service Ratios /a 1976/77 9.2 17.7 26.9 7.9 1977/78 11.2 21.4 32.6 8.3 1978/79 13.5 36.9 50.4 11.1 1979/80 16.8 40.7 57.5 11.6 1980/81 21.7 44.2 65.9 11.5 1981/82 28.5 86.4 114.9 17.8 1982/83 36.4 121.5 157.9 20.8 /a For the purpose of calculating the ratios, the central bank's anticipated purchase of foreign currency from the bazaar have been included in the denominator. The bazaar's holdings of foreign currency are mainly those of workers' remittances and the central bank's purchase of these can thus be counted as service receipts. Source: IBRD projections. As the Table shows, debt-service ratios would increase from about 7.9 percent in 1976/77 to about 20.8 percent in 1982/83. There are two principal causes for this pattern of rapid escalation in the debt-service payment. First, the massive rescheduling of USSR debt-service payment to the latter part of the present Plan period. Secondly, the terms of commitments by some major new donors are now expected to be good deal more severe than could be earlier anticipated. The large debt-service payments from 1981/82 onwards suggests that there will be a need of a further rescheduling of debt, unless prior agreement can be reached on softening the terms of new commitments. 12.39 The initial view of the large and growing current account deficit gives rise to some fears for the longer-term viability of Afghanistan's foreign exchange situation. Such fears would be mistaken however. The large current account deficit does not reflect huge increases in consumer imports (their share would decline from 60 percent of the total at present to 23 percent by the end of the Plan), nor for that matter is it due to sluggish export performance. It reflects Afghanistan's increasing capacity to implement crucial development projects. In all likelihood foreign aid will not be sufficient to meet that capacity. Even with the level of foreign aid pro- jected however, the picture is an optimistic one. Much of the investment in irrigation and industry may be expected to bring results in the mid-eighties and a substantial reduction in the deficit in real terms can be projected by then. In any case there would still be net reserve accumulation over the period. 12.40 The large and growing share of foreign trade in Afghanistan's economy must also be looked on as a cause for satisfaction. Although the rhetoric has sometimes suggested otherwise, it reflects an awareness at the policy-making level that trade will be a leading sector in growth. It is - 311 - evident that Afghanistan's tiny internal market would have great difficulty sustaining an adequate growth rate. In any case, in the context of the developments in the economies of the oil-producing countries, it is apparent that Afghanistan has substantial comparative advantages in agriculture-based production which can be exploited. Afghanistan has an unusually open economy at present. The results have been quite positive in terms of the balance of payments in recent years. Policies which retain that openness and promote the steady growth of trade are likely to be among the most effective in terms of overall development as well. E. Trade Policies and Institutions 12.41 For that part of Afghanistan's trade which falls directly under the control of the public sector, it is apparent that the major policy issues relate to the identification of an investment program and its implementation. For that part - still the majority - that is based on private production, the key is to maintain efficient incentives. Of course these prescriptions are not mutually exclusive, the private sector will need Government investment in irrigation for example to raise production of export crops, while public sec- tor enterprises need to receive prices for their output which promote profita- bility and efficiency. The theme of much of the preceding has been that capa- city constraints are emerging in a number of exporting and import-substituting sectors and the investment program needs to gear itself to overcoming those constraints. The Plan includes in its broad sweep most of the potential opportunities. What is needed now is greater selectivity based on careful calculation of alternatives. But what about the category which is not governed by direct public investment? Is the policy framework adequate to promote efficient private investment? 12.42 Foremost among the policy variables to achieve this end, is the exchange rate. Afghanistan's exchange rate has appreciated,rapidly since 1972/73, from 80 Afghanis to the dollar in that year to 55 in March 1976. The initial stages of the appreciation of the Afghani were associated. with the recovery of the economy from the effects of the 1970/71 and 1971/72 droughts. In general, however, the underlying circumstances are often difficult to identify. In 1974 and 1975 two factors contributed to the strength of the Afghani. The first was the volume of unrecorded trade with the neighboring countries. This consists mainly of re-export of part of Afghanistan's imports, and some import of consumer goods from these countries. There is a consensus that apart from the drought years the trade balance with these countries has usually been positive with a rising trend in 1974 and 1975 reflecting mainly higher incomes in Iran. A second cause lies in what may well be significant capital transfers from Pakistan par- ticularly due to the relative freedom with which foreign exchange transac- tions can be conducted in the Kabul 'bazaar'. 12.43 Since March 1976 there has been renewed pressure on the Afghani, which moved its value up to 43 to the dollar by December 1977. It is unlikely that the positive balance on unrecorded trade and unilateral capital receipts have been a significant factor in this surge. Three new factors would seem to be of importance at present. First, aid inflows since 1975 have increased - 312 - substantially and there have been reschedulings of debt service payments. In addition, sizeable aid commitments have been announced over the past two years by various aid donors. There is thus a fairly general perception that con- siderable amounts of foreign exchange are, and will continue to be available. Second, there is a large migration of Afghan unskilled and semi-skilled workers to Iran and some even to the Gulf states. Figures on the number of workers in Iran range from 50,000 to 300,000. Workers are able to earn incomes of up to $2,000 a year net, working in construction in Iran. Even very conservative assumptions about remittances lead to the conclusion that significant amounts of foreign exchange are flowing back to Kabul. There is evidence of the migration in the rising costs of unskilled labor in Western Afghanistan, where in the past ample labor was available at about Af 40 a day - the wage Has now risen to Af 60 and even Af 100 during peak periods. Even in the east of the country open unemployment is rapidly disappearing from the scene. A third reason is more speculative. It has been argued by agencies outside Afghanistan that with the collapse of Vietnam and Cambodia as major sources of drugs for the Western market, Afghanistan has become much more important in the past two years or so. There is speculation that drug traf- fic might be worth anything from $20 to $100 million to Afghanistan. 12.44 By and large, funds from these sources are channeled through the 'bazaar'. During much of 1976 and 1977 there seems to have been a surfeit of foreign currencies in the 'bazaar' with dealers reluctant to hold more. The effect of this surplus on the exchange rate was held in check throughout 1975/76 and 1976/77 by a good deal of buying by the central bank. Simul- taneously, the Government maintained a preferential rate 1/ for officially documented exports until late in 1976 whereupon the rate was changed to narrow the spread between the central bank's buying and selling rates (since the latter follows the bazaar rate). This measure was rationalized by citing the rise in the major export prices in 1976. Recently, the gap between the two rates has been further reduced since the export rate has been set at Af 48 to the dollar. 12.45 Two issues have emerged from the rapid escalation of the value of the Afghani in the past few years. First, there is the question of the variability of the exchange rate and second the appropriateness of its level. The rate is market-determined and the Da Afghanistan Bank has been reluctant to intervene because of the impact of such intervention on the domestic money supply. (The fact that such intervention must be virtually unanimously agreed to by a large and unwieldly committee has also been a factor). When intervention did take place, it had become unavoidable to stop speculative demand for the Afghani and prevent the increasing cost of paying exporters a subsidized rate. With pressure from the IMF to move to a unification of exchange rates, the Government chose a compromise course of moving the free rate up through purchases in the bazaar and lowering the export rate. The instability of the exchange rate has undoubtedly been a 1/ At Af 56 to one US dollar, compared to import rate of about Af 42 to one US dollar in September 1976. - 313 - negative factor in the promotion of new investment in Afghanistan. What is needed is not a fixed exchange rate, but a commitment by the Da Afghanistan Bank that it will intervene through purchases and sales of foreign exchange, to defend the rate within a reasonable range. 12.46 Is the present exchange rate at the right level, i.e., is it at a level which will promote the kind of investment needed to maintain a healthy external situation in the long-run? Some of the special factors which have prevailed in the past few years cannot be expected to continue over the longer term. Thus, while remittances should remain high their growth rate is likely to slacken, and efforts will be made to reduce the drug traffic and smuggling in general. In addition, the trade deficit is expected to widen as the pace of development expenditure is stepped up. In view of this and in view of the crucial role of agriculture based exports in providing the motive force for the country's growth, and the drive which must take place in the near future to penetrate the markets of Iran and the Gulf countries, it would seem that some minor depreciation and stabilization of the exchange rate is needed. This Report recommends that a unified rate of the order of Af 50 to the dollar should be aimed at, i.e., the subsidized rate for exports which proved effective in their promotion during 1976. The Government should under- take to maintain the rate within two or three points in either direction in the short-run. This position is based on purchasing power parity considera- tions and should ensure adequate incentives both to exports and producers of import substitutes. It would also not require unreasonably large volumes of central bank purchases of foreign exchange from the bazaar in support of the exchange rate, and would thus avoid large increases in the money supply. 12.47 Apart from the exchange rate, the other major policy instrument for import substitution and export promotion is the indirect tax system. The im- port tariffs and indirect tax system do not in general discriminate against domestic manufacturers; indeed the formal protective margins are quite high. There is, therefore, no case for any upward revision of the import tariff on these grounds. There is considerable scope for simplifying the system, however. There should be a single import tariff combining the present Customs Tariff, Service Charges, Red Crescent Charges, Fixed Tax, Monopoly Tax, Authorization Charge, Privilege Charge, and Luxury Tax. Apart from combining these taxes, the protective structure should be recast to ensure that the effective rate of protection is broadly similar on all types of industrial products, so that market forces play a more effective role in resource alloca- tion. Export taxes should be progressively reduced except where it is clear that Afghanistan enjoys a substantial comparative advantage. Where products can be manufactured locally from semi-finished products now exported, with greater net economic benefit to Afghanistan, export taxes on the semi-finished product might be increased to encourage further local processing and value- added, but only after careful analysis of the likely impact. Leather products are a possible example. 12.48 Perhaps policy is weakest with respect to the outright bans which exist at present on the export of certain commodities. This has had a partic- ularly serious disincentive effect on investment in textiles. The reason for the ban appears to be to ensure that all local textile output should go to the - 314 - local market in order to stem the inflow of foreign textiles. The result has been large stocks languishing in producers' warehouses. The other principal export ban is on vegetables, in order to keep domestic prices low. It is clear that in the absence of the ban production could expand very rapidly in response to the higher prices in the neighboring markets, particularly Iran. The quota for vegetable exports given to the newly established Afghan Vegetable Export Corporation is a step forward, but it should be followed in the near future by withdrawal of the ban. It is understandable that the Government does not wish the Afghan consumer to have to compete for necessary food items with much richer consumers in Iran, but an export tax would be a more subtle, flexible and efficient means of achieving this objective. 12.49 In recent years, there has been a certain amount of institutional development in foreign trade. This has been mainly related to specific com- modities. Exports of raw cotton for example, are principally undertaken by Government companies through the Trade Promotion Department of the Ministry of Commerce. Karakul exports are entirely handled by the Karakul Institute on behalf of private exporters. Exports of livestock products are to be handled by the Herat Livestock Development Corporation. A significant part of the total export trade is, however, not canalized; all exports of fruits and nuts not covered by bilateral trade arrangements, exports of wool, hides and skins, carpets, handicrafts, etc.; amounting to more than 50 percent of current exports. With regard to supporting institutions, as distinct from direct trading institutions, the most important are the commercial banks, a major share of whose business is in providing foreign trade credits. In addition, an Export Promotion Bank has recently been set up. For private sector trade, however, the bazaar is the principal source of credit. The Trade Promotion Department of the Ministry of Commerce is the source of market information. 12.50 The relative lack of institutional regulation of foreign trade is an advantage. This permits a good deal of flexibility in trading operations. Traders are free to react to market opportunities without having to negotiate the workings of a slow-moving institution. They are also less accountable to the tax authorities, a matter of some importance in Afghanistan. There are some disadvantages, however, since the small size of the individual exporter weakens his bargaining position with respect to foreign buyers. The Trade Promotion Department of the Ministry of Commerce helps out in negotiating bilateral trade arrangements but has so far been unable to resist unilateral price cuts by foreign buyers. Poor quality control, often cited as the rationale for such unilateral price cuts, is a direct result of the lack of institutional regulation, and the success of the Karakul Institute in enforcing quality control is an impressive example of what can be done. Lack of adequate market information is another handicap preventing quick exploitation of market opportunities. There is thus scope for some fur- ther institutional development. Among the exports not yet provided with institutional support, raisins is a principal category. The activities of the existing Raisin Institute should in time extend to quality control and exporting on behalf of' the private traders on a voluntary basis. The Afghan Vegetable Export Corporation is again a necessary pioneering development. For future export commodities, the present Government policy of making the producing organizations responsible, as in the case of Herat Livestock Development Corporation, would seem to be the appropriate route to follow. - 315 - PART IV: THE DESTINATION: DEVELOPMENT FOR ALL XIII. A STRATEGY FOR AFGHANISTAN'S DEVELOPMENT XIV. CONCLUSIONS - 316 - XIII. A STRATEGY FOR AFGHANISTAN'S DEVELOPMENT 13.01 If development is to have meaning in Afghanistan it must cease to be confined to that small section of the population who have been drawn into the modern economy. Development must begin from the village and the needs of the rural population. The Report presents a strategy aimed at increasing farm output for processing in small towns and local market centers and for sale in the domestic market or export to the prosperous new markets in Iran and the Gulf countries. The incomes which are generated in the villages and small towns would be supplemented by the spread of physical infrastructure to these areas and above all by the provision of social services. This would be achieved by a decentralization of the administration and a new focus on regional and rural concerns. 13.02 Afghanistan is fortunate in that the development strategy which will provide a direct increase in rural incomes also reflects the country's comparative advantage and is likely therefore to maximize output as well. The elements of the strategy are implicit in the recommendations of the preceding chapters of the Report. More than 150 specific recommendations culled from these chapters are listed below in the same sequence as the chapters. Before proceeding to these however, it may be useful to give a clearer indication of the conceptual framework which underlies the Report's strategy, and by implication what we see as the priorities within the very large number of areas where actions are needed. A. Development Priorities 13.03 The strategy for raising output rests on the foundation of a rate of growth of the order of 4 percent per annum in value-added in agricultural production. This would break down as a 2 percent per annum increase in food- grain output and an increase of 6 percent per annum or more in the output of high-value cash crops such as cotton, sugar-beet, fruits and vegetables, and livestock products. The expansion of cash-crop production will permit the development of agro-industries; cotton-ginning and oilseeds, sugar milling, fruit and vegetable preserves and canning, dairy and meat products, etc. It will also allow, as mentioned frequently, a very rapid expansion in exports of these products to neighboring markets. In order to achieve this it is essential that Afghanistan pursue a policy of national food security 1/ so that prices for foodgrains relative to other crops remain at levels which permit a modest diversion of the better irrigated wheat lands to these cash crops. Achieving this will depend firstly on a sustained 2.5 percent per annum increase in yields on irrigated wheat lands, and secondly on a program of domestic procurement, imports and storage by the Food Procurement Depart- ment to build up stocks of the order of 200,000 - 300,000 tons of wheat for 1/ As explained in Chapter IV, food security is not synonymous with food self-sufficiency. The former could include food imports as is proposed in this case. - 317 - marketing during drought years (see para. 13.20). Curious though it may seem, the success of a cash crop production strategy is as dependent on the programs for wheat production and marketing, as it is on the detailed programs for the cash crops themselves. 13.04 Higher levels of agricultural production depend in turn on inputs and irrigation. The performance with regard to inputs has been creditable to the point where one can see that the continuation of the present growth and improvement of the institutions providing fertilizer, seeds and credit, will serve the needs in these areas. The weak link in the chain is irrigation. Water is the single most important constraint on Afghanistan's agricultural development, yet it is being wastefully used through the persistence of tradi- tional systems of water management which are not appropriate to modern market- oriented agriculture. The need to increase water availability and to make better use of the water which is there, are paramount to the longer term development of agriculture in Afghanistan (see para. 13.24). 13.05 The next step in the output strategy is the development of indus- tries which process agricultural output, provide services to agricultural producers and manufacture the consumer goods to be purchased out of increased agricultural incomes. This describes the potential for a wide range of prod- ucts, with small-scale production oriented to local markets; in addition to those mentioned in 13.03 above, examples include farm implements, tractor repair shops, furniture, ceramics, etc. Small-scale local production in Afghanistan is almost by definition the area in which the private sector has a major comparative advantage. Yet present policies do not give adequate rec- ognition to the important contribution which the private sector could make in the development of these activities. The confidence of the private sector is at a low ebb. The Plan pre-empts, for the state enterprises, a wide range of products suitable for private production. Entrepreneurs are harried by arbi- trary tax procedures and a general atmosphere of distrust. Small wonder that private investment in manufacturing has slowed down to a trickle. The public sector is not in a position however, to take up the slack. The managerial experience which is available in the state enterprises is stretched to the limit by its present responsibilities, let alone the extremely ambitious proposals in the Plan. The enthusiastic response to the scheme recently introduced by IDBA, while only a small beginning in itself, is evidence that a program to foster the development of private small-scale industry in Afghanistan could play an important part in the overall strategy (see paras. 13.28 to 13.31). 13.06 The development of private industry at this stage of Afghanistan's development represents no threat whatsoever to the primacy of state enterprise. The development of public and private industry is complementary. The worrying thing is that the single-minded pursuit of state enterprises may steer the Government into large-scale, capital-intensive investments which in many cases do not reflect Afghanistan's comparative advantage at this point in time. The diversion of scarce managerial and financial resources to heavy industries and related infrastructure which promise little benefit for the population during the next ten years, must be the subject of careful soul-searching. The Plan - 318 - is essentially a project list. It contains almost every high priority activ- ity which could be envisaged during the next decade. But it includes many with doubtful economic returns and questionable impact on living standards. The danger is that in the context of shortfalls in external finance and limited implementation capacity, the cuts will come in the areas of critical importance, while more eye-catching, but less useful projects are retained. This has hap- pened all too often in the past. The Government should take the initiative now, to review the Plan and identify a core of activities which are critical for a broad-based development (see para. 13.34). 13.07 When that is done there will remain a number of well conceived investments in public industry which merit support; the exploitation of the country's coal and copper resources, and parts of the programs for fertilizer, cement and textiles are cases in point. With the continuing expansion of state enterprise, there must be a serious effort to upgrade management prac- tices, especially as they relate to financial operations (see para. 13.35). A second point to be made about the public investment program is that some of it depends on the export of the products of heavy industry in areas where the neighboring countries which are the natural markets, are developing their own production. It will be necessary to secure long-term trade agreements before investments in these areas are undertaken (see para. 13.72). 13.08 For an optimal pattern of output expansion to take place, the incen- tive system must provide the right signals to producers and investors. The Government of Afghanistan has an excellent record in this respect. The eco- nomy is open, price controls have been kept to a minimum, levels of effective protection are appropriate given the infancy of the country's industry without being excessive, and even the interest rate has been kept at modestly positive levels in real terms. The results have been quite impressive; prices are relatively stable and exports are growing rapidly. There are some worrying signs however. For a number of reasons (see para. 12.02) there has been a substantial inflow of foreign exchange in recent years and a considerable appreciation of the exhange rate. It is now at a level which is possibly damaging to long-term export growth and the exploitation of domestic import substitution opportunities. Some of the factors, such as remittances, earn- ings from unofficial trade and capital flight from neighboring countries, which have contributed to this effect, may not be sustained in the longer term. It is essential to keep the exchange rate under.careful review to insure particularly that the promise of an export-led development is not stifled by inadequate incentives (see para. 13.71>. 13.09 One of the most attractive features of the output strategy proposed is that it will bring added employment and income to the population groups which need it most. There should be sufficient 'trickle-down' that the vast majority will be able to meet those basic needs which can be satisfied through the market; food, shelter, fuel and clothing. Other needs must however be met through public distribution systems and the slow progress in these areas at present is a cause for serious concern. The failure of health and education programs to reach the majority of the population reflects in part general ad- ministrative weaknesses, but it is also a consequence of the lack of priority these programs have had in the past and that even within these programs the - 319 - objective of meeting the basic needs of the mass of the population has not been given its due importance. 13.10 The education sector provides evidence of this. The education system is oriented towards formal schooling to prepare students for the next level. It is not sufficiently related to the needs of the community in general, and the rural community in particular. Even the formal schooling is not cost effective. Coverage remains low and there are large numbers of drop-outs and repeaters. Unfortunately the changes which are proposed do not offer promise of improving the situation. They would attempt to increase the average number of years each student spends in school and reduce the size of classes. This will hardly achieve the expanded coverage which is so badly needed, or make the content of what is taught more useful to the lives of the students. In addition, non-formal education has received short shrift in the new proposals. rhe program in the education sector needs re-thinking (see paras. 13.40 to 13.46). 13.11 Much of the same limitations are evident in the health sector. The amphasis in health has been on curative medicine - on building better hospitals in the main centers. The few who have access to these modern medical facili- ties return to the same unhealthy environment from which they contracted the disease in the first place. Meanwhile the life expectancy in Afghanistan remains among the lowest in the world, with astronomical rates of infant and child mortality. Preventive measures must be moved to center stage. There is no doubt that sanitation, better nutritional practices and above all, clean water, could achieve a dramatic improvement in the situation. Although a start has been made in this direction, these programs are not yet receiving sufficient priority in either budgetary or manpower allocations. Family planning activities also have an important role to play in improving the health of mothers and children, and merit greater support than they are receiving at present (see paras. 13.47 to 13.52). 13.12 In the past, the causes of the inadequacies of the investment pro- gram and the lack of success at meeting basic needs, have been laid at the door of Afghanistan's limited implementation capacity. Resources have not been looked on as an effective constraint. This was probably an oversimpli- fication in the past, but it is certainly not the case in the future. The availability of external assistance will be a factor in carrying out the Plan. A new dimension is likely to be added, however, as a consequence of strains in the domestic resource situation. Sources of additional tax revenue appear limited, while expenditure could, and indeed, should increase rapidly, since current expenditures to utilize existing capacity and carry out social pro- grams are of great importance. If legitimate needs are not to be starved of funds, then new sources must be found. Gasoline, for which controlled prices contain only a very small effective tax element at present, is a major poten- tial. There is scarcely a country which does not exploit this as a source of revenues, and in the case of Afghanistan where higher gasoline taxes would scarcely touch the vast majority of the population, this is a curious anomaly (see para. 13.66a). It is not only gasoline use which is subsidized however. There are a plethora of subsidies covering such items as wheat for civil servants, pocket money for university students, domestic air travel, charcoal - 320 - briquettes and many more. Many of these subsidies are given for products or activities which may be expected to expand very rapidly in the medium-term, thus substantially increasing the budgetary drain. These subsidies need to be reviewed and consideration given to withdrawing many of them now, before the political pressures for their retention become too strong. In Afghanistan the incidence of substituting these subsidies by broadened social programs would almost certainly be progressive (see para. 13.66). 13.13 When all is said and done, it is the capacity of the administration to carry out these programs which will determine the pace of Afghanistan's development. So much has been written about the weaknesses of the administra- tion with 9o little effect that the reader must judge whether we are brave or foolish to raise the subject yet again. Indeed it must be confessed that part of the mission's confidence in the strategy proposed, is that as compared to the past, it is less dependent for its success on the effectiveness of admin- istration, or is more dependent on the areas of administration in which there are proven abilities e.g. the supply of agricultural inputs. To its credit the Government has often been willing to recognize the limitations and to devise sound policies which do not depend on administrative procedures for their impact. But'if there is to be a breakthrough, if the rate of growth is to reach five or six percent in real terms, if basic needs are to be met, then the administration will need to make a far more positive contribution to development than in the past. 13.14 Upgrading Afghanistan's administrative capacity will, not be an easy task. The salaries of Government officials have fallen by 50 percent in real terms since the mid-60s. This decline has contributed to lower morale.and even petty corruption. Increasing opportunities for well-trained Afghan professionals are available outside the country. The main reason to raise salaries however, is not to compete effectively with other opportunities., but to signal to Government officials that they are expected to play a part in the country's development. We regard a substantial increase in government sala- ries as a necessary condition for any advances in this area.(see para. 13.55). But not a sufficient condition, however. That will depend on a host of reforms in the system under which government officials now operate, and which prevents even those who are motivated from operating efficiently.. These re- forms relate to personnel policies, budgetary procedures, supply management, auditing and so on. Essentially Afghanistan has a traditional civil service system with emphasis on stopping the wrong things from being done, at the expense of getting the right things done. This will not be changed overnight, but there are many areas in which action would provide the basis for the confidence and initiative which will be needed for Afghanistan's development (see paras. 13.57 to 13.60). 13.15 One particular weakness in the administrative framework relates to the institutions and personnel for planning. Two decades of technical assis- tance in the planning field have produced all too little impact. The Plan is still essentially a collection of projects which depend on the availability of foreign financing for their inclusion. It is regrettable .when low priority projects for which aid is. available are included in the Plan, yet a critical program like road maintenance is only included up to 1980 because there is - 321 - no foreign aid committed for it beyond that date. There are many weaknesses in the planning set-up: The Plan is poorly coordinated with the Budget; the Planning Ministry itself is under-staffed; the Operating Ministries have very weak Planning Departments which carry little weight within the Ministries themselves; there is no place within the system where basic studies on eco- nomic policy can be carried out to provide support to decision-makers; and finally there is a vacuum at the highest levels of economic policy through the failure of the Supreme Economic Council to become an effective entity for taking decisions. Basic changes are needed, not more technical assis- tance (see para. 13.61). 13.16 One strand has consistently emerged from the analysis of problems in every sector the mission has looked at. This is the need for a new emphasis on regional and rural development. In agriculture it is a matter of develop- ing small irrigation structures and feeder roads at the local level, and of giving extension services the incentive and freedom to operate effectively. In industry there is the potential of small local industries and their require- ment of adequate power supplies and transport facilities if they are to suc- ceed. In health and nutrition there is the need to reach the rural population and communicate to them the impact which better practices could have on the quality of their lives. This must be supported by the development of banks, schools and health centers at the local level. The development process must be brought closer to the vast majority of Afghanistan's population. 13.17 The decentralization of the administrative structure so as to pro- vide financial and manpower resources in the provincial centers is a sine qua non for promoting regional and rural development. In recent years the growth of the Rural Development Department (RDD) has been one of the most encouraging institutional advances on the Afghan scene. The young men who go out into the provinces and live in tents for the two or three months that it takes to com- plete the work on a small project, are the promise of a different future. The system has not yet dampened their hopes and enthusiasms. There is work to be done. A small culvert is needed here so that the villagers can bring their produce to market. Some minor earthworks are needed there to stop the tradi- tional irrigation structures from being washed away each year. The rural development program can and should become the cornerstone of a new approach to development based on local participation and responsibility (see para. 13.26). B. The Mission's Proposals 13.18 The following pages present a set of detailed recommendations for actions and studies drawn from the analysis of Chapters IV through XII. Agriculture 13.19 Agriculture is the centerpiece of any development strategy for Afghanistan. This is not simply a matter of its large weight in GNP, but even more importantly the multiplier effects of agricultural growth on handi- crafts, small industry and trade. The prospects for agricultural growth are good, but they depend on the ability of the Government to play a much more supportive role than in the past through a combination of appropriate incen- tives, effective research and extension, wider-spread distribution of inputs - 322 - such as fertilizer and seeds associated with increased credit, and investment programs in irrigation. The existing programs in these areas are well con- ceived by and large. The problems relate to their implementation. The recom- mendations below relate of course to the inevitable gaps and weaknesses of the present strategy. It is important to stress therefore the mission's sup- port for the approach and endorsement of the existing programs, particularly those relating to fertilizer, seeds and credit. 13.20 The main element of the agriculture strategy is the need for food security. What is needed here is the realization that this is not the same as food self-sufficiency and that a well administered program of imports, domestic procurement, storage and marketing can be just as effective in insuring food requirements, while resulting in substantial net economic benefits through releasing land for production of high value cash crops such as cotton and sugar beet. In order to promote national food security it is proposed that: (a) The Food Procurement Department (FPD) be authorized to buiid up stocks of up to 300,000 tons through domestic procurements and imports. Purchase and release of grains should be related to minimum and maximum price levels fixed by the Government. (b) The FPD be re-organized to make it an effective trading organ- ization, and the supply of subsidized wheat to civil servants, which takes up most of the Department's energies at present, be discontinued. Civil servants would be more than compensated by the salary increases proposed in para. 13.55. (c) An "early warning system" be developed and instituted as pro- posed in a recent FAQ study (see para. 4.42) to enable FPD to have sufficient lead time for its operations. 13.21 Intensive cash-cropping for export or domestic processing, is Afghanistan's agricultural future. There are many potentials but the most important one in the medium-term is cotton. The responsibility for cotton is divided between the Ministries of Agriculture, Mines and Industry, and Commerce at present, with the result that there has been a failure to take an integrated view of the problems facing this sub-sector. The mission recommends: (a) The establishment of a Cotton Board, with representation from growers, ginneries, other processing industries, and the con- cerned Ministries. The Board would be responsible for the whole range of cotton related activities, except for the in- ternal management of the state enterprises involved, and the agricultural extension, research and credit programs. (b) An independent review should be carried out of the purchase arrangements of the ginning companies to ascertain why they have become so unpopular with farmers as to be a definite dis- incentive to new cotton production. No foreign expertise is required for such a review and its recommendations could be - 323 - submitted to the concerned ministries within two months. The reivew should include consideration of the impact of the resumption of private trade in cotton. (c) The research and extension effort in cotton is woefully weak. Technical assistance is needed in this area and it is recom- mended that a contract be signed for the duration of the Plan. An evaluation study should be carried out within the Ministry of Agriculture on the existing program and what needs to be done to upgrade it. (d) Cotton marketing and producer cooperatives should be promoted to allow for the more rapid and efficient development of the sector, and to give smaller farmers who are reluctant to go into cash-cropping, with its relative riskiness, the confidence to do so. There is no need to elaborate recommendations for other export crops since this is done in the two Bank reports on agriculture and horticulture cited in Chapter IV. In para. 13.76 below, mention is made of the need to remove completely the ban on vegetable exports to allow increased production in this very promising area. 13.22 The final crop category which needs to be looked at is livestock. Here again the potential is limited only by the availability of water and grazing. In the long-term the cycle whereby flocks are decimated in drought years and take a very long time to regenerate, must be broken. There are very promising programs being undertaken by the Herat Livestock Development Corpo- ration (HLDC) which seem to offer possible avenues of achieving this. It is proposed that: (a) A careful evaluation of HLDC's programs should be carried out in the course of 1979 to confirm their appropriateness and. replicability. Subject to this, a range improvement program needs to be undertaken, along with measures to strengthen veterinary services. (b) An animal feed industry should be started, based initially on molasses from the Baghlan sugar beet factory. (c) Serious consideration should be given to the encouragement of dairying activities, which represent both a considerable agricultural potential and also an important contribution to the nutritional needs of mothers and children (see Chapter III). Dairy development could be associated with integrated rural development schemes. The establishment of a department with special responsibilities for dairies and promoting milk consumption, in the Ministry of Agriculture, should also be considered. - 324 - 13.23 The agricultural potentials suggest that a sustained increase in value added in agriculture of 4 percent per annum is possible. Its achievement however will depend on a modernization of Afghan agriculture. The emphasis must be on developing viable small farms and providing farmers with supporting services, inputs and investment to exploit the many profitable opportunities which exist at present. An important first stage however, will be to focus on the farmers themselves, to make sure that they are able and motivated to change their practices. (a) Programs of non-formal education addressed to the needs of farmers and farmers sons, should be greatly expanded as pro- posed in 13.43 below. (b) There should be an attempt to involve farmers more closely in the operations of the agriculture sector, through farmer repre- sentation on the boards of the AgBank, AFC and ASC for example, and through increased cooperative activities with groupings of local cooperatives into apex cooperatives. 13.24 The most important input - the necessary condition for successful agricultural development - is irrigation. The mission proposes that: (a) A master plan for irrigation development be prepared with expert assistance to be completed by mid-1979. It should be based on realistic assessments of implementation capacity and external finance. (b) Responsibility for on-farm water use be returned from the Ministry of Water and Power to the Ministry of Agriculture. (c) The Ministry of Agriculture should follow up on that respon- sibility by commencing a research program on crop-water relationships, to determine optimal patterns of water use. (d) Crop-related water charges are essential in the long-run if the best use is to be made from limited water availabilities. A study on water charges is currently under way and it should be carefully reviewed and implemented as soon as possible if appropriate. Consideration should also be given to adopting alternative water charging regimes in different irrigation schemes to provide guidance as to which approach is most effective, and above all, raises the least problems of public resentment and administrative complexity. (e) Groundwater has been neglected in the past four years. Interest tends to revive in drought years and then disappears in good years. Groundwater may have an important and economic role to play as a supplementary irrigation source and it is recommended that two studies be undertaken. One would look at the economics of groundwater development and the best approaches to getting - 325 - a program implemented, while the second would attempt to deter- mine the areas with the greatest potential for groundwater development and prepare a suitable plan. The studies would of course be combined under a single umbrella, which might well be AgBank, which would play a key role in whatever programs are evolved. 13.25 To correct the weaknesses of extension and research will be one of the most difficult and yet urgent tasks facing the Government in the Plan period. The problem is that these things cannot be done overnight. It is a matter of training, motivation, new procedures and establishing the links between research and extension. The mission proposes that: (a) A review be undertaken of the arrangements for agricultural education and training. This would require some expert assistance and could be completed within six months. (b) Regular inspection programs by senior officials be under- taken to look at the extension and research activities. These activities should be further helped by the incentives for Government officials stationed in the field, which are proposed in para. 13.59 below. (c) Greater flexibility in allocating funds at the local level is desperately needed if the extension program is to succeed. Since it is one of the most important regional programs, it is greately hindered by the lack of decentralization in Afghanistan's administration. Once again the change in bud- getary procedures suggested in para. 13.59 below should proved useful. (d) The proposed National Agricultural Research Institute should be set up and its first task should be to carry out an appraisal of existing research programs and how they relate to needs. 13.26 With the increased agricultural incomes which should be generated over the Plan period, the question of income distribution in the rural areas becomes even more important than it is now. Chapter IV, paras. 4.93 to 4.123 discusses ways in which more equitable income distribution might be achieved. (a) The Government must continue to press the land reform vigorously, but in recognition of the complexity of the program and the inevitable delays in its implementation, certain areas where the problem of inequality of land ownership is most serious, should be identified, and the program should focus on them in the initial stage. (b) The cadastral survey is in terrible shape: It is taking forever; what has been completed is thought to be extremely unreliable; and there is some evidence that corruption has crept into it. A short three month review with expert assistance, of what should - 326 - be done with it is sorely needed. It may be that the best thing would be to rely on aerial survey work. (c) A major lacuna in the present legislative framework relates to land tenure. The Government must attempt to control share- cropping arrangements, in order to move them in the direction of fixed rentals, so that tenants have greater incentive to invest. Security of tenure is also needed and with it, tenants should be given the opportunity to borrow from AgBank and to join cooperatives. (d) Cooperative membership should also be encouraged for the smaller farmers (below 0.6 ha). The size of each cooperative should be expanded and more than one village covered. The program could be an important one and accelerated development is proposed in the Cooperative Departments' capacity to train its own staff and in farmer management of the cooperatives. (e) The rural development program has the makings of a success story. The Government has rightly resisted the temptation to expand it too rapidly, but it is now gaining in confidence and experience and a somewhat greater expansion than is envisaged in the Plan can be contemplated. The introduction of proj- ect books might be especially useful in helping to get the provincial administration to focus on the needs of the province as a whole and in building up local capacity to identify and carry out rural projects. Private Non-Agricultural Enterprises 13.27 While the agricultural sector is the key to Afghanistan's develop- ment strategy, there are important potentials in industry as well. For a number of reasons the Report has chosen to emphasize the role which the private sector can play in industrialization. In the medium-term it appears that decentralized, small and medium-scale industries, which process agri- cultural surpluses mainly for export markets are an exceptionally promising avenue for investment. These are ideally suited for private or cooperative development. The time has come to look on Afghanistan's private sector as an ally rather than a threat, and to formulate policies and programs accordingly. 13.28 The starting point lies in the definition of the broad institu- tional provisions concerning private industry. (a) The Government should publish a list of industries which are reserved for the public sector. For the rest private invest- ment should be permitted regardless of size. Assurances should be given that no further nationalizations will take place. Similar measures should be taken to encourage foreign private investment, which has infinitely more potential than the paltry $10 million or so that Afghanistan has received in this form. - 327 - (b) The requirement that Afghan participants hold 51 percent of the equity and thus have management control of the enterprise should be relaxed in the case of export projects (e.g. leather, processed foods, etc.) and in those projects for the domestic market which are in new fields or which utilize a technology which is new to Afghanistan. 13.29 By and large, the incentive system in Afghanistan is generous to private entrepreneurs. Indeed at a later point of time, if private confi- dence returns, consideration might be given to withdrawing some of the FDPIL benefits, particularly for firms locating in Kabul province. At present, however, the problem is mainly administration, both of the FDPIL and of the income tax laws for those firms which are no longer eligible for FDPIL benefits. (a) FDPIL processing should be speeded up as follows: (i) For projects with an investment in equipment of less than Af 4 million, FDPIL should be given automatically on receipt of IDBA assistance. (ii) For projects with total investment in fixed assets including land and equipment, of less than Af 50 million, a simplified procedure should be adopted which does not require specific approval by the Investment Committee. (iii) For projects above Af 50 million the present procedure should be retained with the proviso that the Investment Committee should meet at intervals no longer than two months. (iv) For changes in previously approved projects, the same criteria should be adopted, except that smaller projects could be approved directly by the Department of Investment Promotion. (b) A five-year statute of limitations on income tax violations should be enacted, and an independent appeals procedure should -be instituted. (c) Where private firms keep proper financial accounts, and these have been subject to an independent audit, the tax collectors should be instructed to base their assessment on these accounts unless thay have major disagreements with the auditors. 13.30 One important objective should be to decentralize private industry. This is not merely a matter of forcing entrepreneurs out of Kabul, but of stimulating private investment in other centers. Rising agricultural incomes represent a potential which has not been tapped at all as yet. - 328 - (a) New industrial estates should be set up in the main provincial towns (Herat, Kandahar, Mazar-i-Sharif and Jalalabad). The IDBA should set up branch offices at each of these estates, as should one of the commercial banks. These offices should play a role in promoting new industrial development in these areas. 13.31 This leads directly to the institutional support to be provided to the private sector. The efforts of the IDBA have been important not in pro- viding financing, but in developing confidence and providing technical assis- tance. These efforts must be strengthened. The small industry Development Assistance Fund (DAF) is an important new initiative. (a) *IDBA should be authorized to implement its proposals for set- ting up technical consultancy and also accounting services. (b) The commercial banks should be pushed in the direction of lending to private industry through the issue of special instructions and the organization of special training courses. (c) The Department of Investment Promotion should be moved to the Ministry of Mines and Industries to emphasize that public and private industry in Afghanistan are indeed complementary and not competitive as they seem to be regarded at present. Such a move would permit better coordination of sector planning. (d) A study should be carried out over a three or six-month period with expert assistance, to look at the possibilities of sub- contracting from the public to the private sector. IDBA should participate with the Ministry of Mines and Industries in such a study. 13.32 Handicrafts are an important sub-sector of the private economy in Afghanistan. While there is a certain amount that can be done, the mission urges against hasty intervention in this area. Para. 5.07 delineates a longer- term action program, but the most important step in the short and medium-term would seem to be to strengthen the Afghan Handicrafts Promotion Center. (a) A study should be carried out over a three-month period with expert assistance, to prepare a Plan for the development of the AHPC with regard to design, quality control and marketing. Public Sector Industry and Mining 13.33 Whatever policies are adopted with regard to the private sector, the public sector will be the main engine of industrial growth during the Seven-Year Plan period. Two of the most important issues which the Govern- ment will have to face are first what should be the scale and content of public industrial and mining investment and second what should be done to upgrade the management of the state enterprises. - 329 - 13.34 We have made the point many times in this Report, that the Plan is really a list of projects. The determining factor at present in whether these projects are undertaken or not, is the availability of foreign financing. This is not the basis for a viable investment program. Decisions should be made on a core of projects which relate to the overall strategy, and the infrastructure and manpower investments should be tailored to the needs of these projects. Foreign financing should be sought for these projects, but if it is not available then consideration must be given to financing these projects from Afghanistan's own resources. The automatic link between foreign aid available and the investment program must be cut if planning is to mean anything in the future. For the moment, neither the foreign aid nor the implementation capacity is adequate to a program the size of that in the Plan. The mission proposes that: (a) A core of suitable projects, comprising about 60 percent of the currently proposed investment, should be selected for implementation during the Plan period. (b) Once the selection has been made, a working group should be set up including representatives from the Ministry of Higher Education and experts, to identify the manpower and training needs and set up a program to meet them. The mission has the following proposals to make concerning the contents of the list of core projects: (c) (i) The railway/Hajigak iron ore complex is premature on grounds of manpower availability and administrative capacity. The mission would not wish to pre-judge the technical and economic feasibility of these projects, but aside from their resource needs, they will pre-empt too much of the limited manpower availability during a time when many other investment options present themselves. (ii) Programs for cotton textile and sugar production should be re-evaluated on the basis of likely irrigation and other agricultural developments. (iii) There should be a review of the possibility of advancing the exploitation of Ainak copper. This may be made easier by a postponement of Hajigak iron-ore. (iv) The program for coal development scarcely touches its potential as a major energy resource, yet even that may prove hopelessly optimistic unless a suitable program is set up for the exploitation of this resource. A six-month study should be carried out, with participation from the Ministries of Mines and Industries, and Water and Power, and with expert assistance, to develop a suitable program. - 330 - (v) A list of small industries currently in the public sector investment program, should be given over to private investors. These include bakeries, tanneries, glass manufacturing and chinaware, starch and plastic products. They pre-empt scarce financial and managerial resources from other, more important public sector activities. 13.35 The need to do something about the management of state enterprises has been a recurring theme of so many reports written about Afghanistan that we almost hesitate to raise it yet again. Perhaps it would be useful to begin by setting the record straight and acknowledging that the Government is fully aware of the need and that indeed the past three years have marked a percept- ible improvement in the operations of the state enterprises, measured by the criterion of physical output, or capacity utilization. If proper financial accounting were available, however, this might show a very different story. It is more than likely that the state enterprises constitute a greater bud- getary drain at present than they did previously. Somehow it does not seem to be recognized in Afghanistan that these financial losses are a measurement of the fact that the economy is being deprived of real resources which could be better utilized elsewhere. Or else they are a signal that output is being priced too low and that subsidies are being given to the consumers of the product of the enterprise. This may be desirable, but it is a decision made by default in Afghanistan at present, and the beneficiaries are often the privileged groups who could afford to pay higher prices. At the risk of repeating what everyone knows, the mission suggests that: (a) The Laws of Tasady and Purchase be repealed. Recent revisions have not served to remedy their defects. Indeed they have increased the degree of centralization in state enterprise management. It is not at all clear that the management of the state enterprises need be regulated by Statute. The legislation could simply enable a more flexible administrative code to be prepared. The administrative code should emphasize the delega- tion of day-to-day management and the use of financial perform- ance indicators by the concerned Ministries. Among matters delegated to the enterprise level should be marketing, financial management and staffing except of course for the seniormost rank. (b) All state enterprises should be required to submit annual accounts. This is in the present statute, but is not enforced. To assist the enterprises, it is proposed that years prior to 1975/76 be dropped for reporting purposes and that efforts be concentrated on getting the accounts up-to-date. A deadline of March 1979 should be set for having accounts prepared up to and including 1977/78. The objective in future would be to prepare a Report for the cabinet within six months of the end of the fiscal year. - 331 - (c) A working group on the budgetary presentation of public sector enterprise accounts should be set up. At present this is less than useless and permits no conclusions to be drawn on the budgetary impact of public sector operations. The group should include representatives of the Finance Ministry and the Indus- tries Ministry and should have expert assistance. It should report within six months. (d) IDBA's proposals mentioned in 13.31 for an accounting institute and technical consulting capacity will be of help to both the public and private sectors, and merit Government support and follow-up. At various other points in these recommendations, the question of sector planning has been raised. The problem is particularly serious in the indus- trial sector and the mission proposes: (e) The creation of an Industrial planning unit covering both the private and public sectors. Its functions should include project identification and coordination of public and private sector investment activities. Physical Infrastructure 13.36 Much of the focus of past development in Afghanistan has been on physical infrastructure, yet what exists is still inadequate for the needs of a broad-based development effort. By and large infrastructure development has been geared to the needs of the small modern sector and reflects that sector's dependence on the Kabul-based administration. There is an impressive series of inter-city roads connecting the main cities and towns with the capital, and more than half of the power and telephone lines are for the use of Kabul residents. The rural areas which provide the likelihood of the vast majority of Afghanistan's people have been almost untouched. Even the other main towns lack the kind of infrastructure which would be needed for example to support small-scale industry development. This must change in the context of a strategy which raises living standards in rural Afghanistan. Yet present programs are dominated still by urban and particularly Kabul-oriented invest- ment. Part of this is the emphasis, no doubt well-meant, which is placed by donors on institution-building. Their instincts are to strengthen the organi- zation in Kabul of the concerned agency and then gradually have it broaden its reach to the rural areas. This approach is hopelessly long-term since so much still remains to be done even in Kabul to achieve complete coverage of the population with infrastructure facilities. In any case there is no evidence that because an institution functions effectively in Kabul-it will necessarily be able to do so in the rural areas. One has only to look at the ineffectiveness of the commercial banks outside Kabul to demonstrate this. The approach must change to one of regional development. For example, plan- ning for the western region must focus on the relationship between Herat and its hinterland, and not as of now be compartmentalized into either urban development which looks at Herat in relation to Kabul, or rural development which looks at villages as isolated units without any links to other villages - 332 - or towns. In view of this the mission has a general proposal concerning the administrative structure of Afghanistan. (a) The proposal to establish four or five regions with planning offices at the regional headquarters, should be revived and broadened and the control of irrigation facilities, road maintenance and construction of minor roads, water supply, telecommunications, power, etc. vested in the regional offices. Many of the social services could also be re-structured to delegate control to these offices. The activities should be coordinated by the head of the planning office who should have the rank of Deputy Minister. 13.37 The transport sector will bear the brunt of the strategy. The primary road network in Afghanistan is impressive. The Salang pass must rank as one of the most spectacular stretches of roadway in the world. In addition, the main roads are well-maintained. It is when one leaves the primary road system that the problems begin to mount. It is indicative of the attitudes towards the sector that there is no Ministry of Transport in Afghanistan. Road construction is carried out by the Ministry of Public Works and this often seems to reflect itself in an attitude to roads as ends in themselves rather than components of an economic and social system. The mission's recommendations are as follows: (a) A Ministry of Transport should be set up with two Deputy-Ministers, one covering Surface Transport and Transport coordination and the other Civil Aviation and Tourism. Responsibility for construction and maintenance of primary and secondary roads could remain with the Ministry of Public Works, while the new Ministry focusses on the planning function and the regulatory activities presently carried out by the Ministry of Commerce. (b) In the rural areas the need is not so much for new construc- tion of the tertiary network as to upgrade it through improved maintenance. There would still be a need for new construction of small stretches linking villages and farms to the network. To implement this a 6 month study is proposed, to recommend how the activities of RDD in this area can be stepped up, and to lay the basis for a vastly expanded organization structure for the rural road network. (c) In an earlier recommendation it was argued that the railway was premature from an organizational and manpower point of view. While this is certainly true in relation to the present highly ambitious proposal, it may be that short spurs, extending the Iranian and Pakistan systems to Herat and Kandahar respectively, combined with bilateral agreements on through transport by sealed wagons would prove economical. The mission recommends a con- sultant study of this, in conjunction with proposals for a general review of transit needs. - 333 - Some of the problems of the transport sector relate to the inadequate regula- tion of vehicles, which increases the costs of road maintenance and therefore transportation in general. (d) A working group should be set up to produce within three months a proposal on the enforcement of the existing regulations on vehicle weights and dimensions. (e) The tolls on various stretches of road should be withdrawn and instead the sector should be taxed through a large increase in the price of gasoline at the pump. The proposed increase would raise the price in steps to double its present level by the end of the Plan period. (f) A study should be initiated with expert assistance to produce within six months, recommendations on two topics: (i) the appropriate structure of import duties on trucks, buses and cars; and (ii) the appropriate levels of tariffs to be paid by the Government to private truckers for carrying Government goods. (g) A study should be initiated with expert assistance to produce within six months, recommendations on how to stimulate the development of private contracting for road construction in Afghanistan. The Ministry of Public Works should be asso- ciated with the study. Another area of the transport system which needs attention is civil aviation. Here the important problem is the lack of coordination with tourism, which would be alleviated by the earlier recommendation to create a special section in the proposed Ministry of Transport, combining these activities. The new airport which is proposed to be built at Logar depends on the extent to which the now stagnant volume of tourist arrivals, can be increased. Recommenda- tions on the tourism sector are contained in para. 13.74 below. 13.38 In the long-run. Afghanistan is in a fortunate situation with regard to energy and power. The hydro-potential is considerable (though in many cases there will be a trade-off between power and irrigation); there are small amounts of natural gas, which is already being exploited, and petroleum, which is not. Exploration has been limited and there are promising structures which are quite likely to yield further reserves. Above all there are large quanti- ties of coal with minimal exploitation and use at present. If cotton is the white gold of Afghanistan's future, then perhaps coal is the black gold. Yet this important industry is being treated as a step-child. The mission recom- mends that: (a) A national coal development survey be initiated. It should have an initial life of one year and be carried out mainly with expert assistance. It should propose changes in the organization, marketing and pricing policy for coal, and work out an investment strategy. - 334 - (b) In the interim some immediate steps are proposed: (i) The Northern Coal Department should become a separate enter- prise. (ii) Two months of foreign expertise should be hired to propose what should be done about the briquettes factory that hasn't functioned for ten years. (iii) Coal prices should be raised by 25 percent. (iv) The NCD should sell coal for cash from its depots in Kabul and open depots in other cities on the same basis. With regard to hydrocarbons, the mission recommends that: (c) The Government Monopoly for petroleum exports should be transferred to NOC and the new pricing structure for gasoline which is referred to in a number of other recommendations should be implemented. (d) Legislation should be introduced to provide safeguards for foreign oil companies as an inducement to them to carry out exploration in Afghanistan. (e) A master plan for the optimal utilization of Afghanistan's natural gas resources should be drawn up in the course of 1979, to determine the best overall rate of exploitation and the mix between exports and domestic use for energy or as a feedstock for the fertilizer industry. (f) The level of natural gas prices on sales to the USSR should be kept under constant study, and re-negotiated if necessary. The Government may wish to retain under long-term contract some foreign expertise in this area. (g) A training school for field workers in gas and oil operations should be established. 13.39 With regard to power, the ongoing least cost development study will provide the basis for much re-thinking of the strategy, and there is no point in making proposals in advance. The need for regional and rural electrifica- tion is obviously one of the keys to the sector's development and this would be promoted by a more effective regional organization. The Report also makes a number of proposals for strengthening the internal organization of the two major institutions involved in the power sector DABM and WAPA. Many of these reflect recommendations made at other points of the Report, such as improved accounting, higher salaries, training, simplified administrative procedures, etc. Education and Manpower Development 13.40 In the education and training sector, the mission urges certain modifications in the country's educational strategy for development to make the system more community- and development-oriented, and to help resolve the major issues of equity, efficiency, productivity, quality and management. - 335 - 13.41 For a more equitable distribution of educational opportunities the mission proposes a strategy of horizontal expansion expedited by the following measures: (a) school mapping to establish the optimal location of a network of primary schools. (b) expansion and improvement of the quality of the village schools in terms of facilities, curriculum and teachers. (c) introduction of the (4 + 4) - 4 nuclear system of configuration of schools. (d) a comprehensive plan for nonformal education to cope with the growing size of the out-of-school population. (e) introduction of a number of experimental community centers with a community-based skills curriculum to attract female enrollment. 13.42 Educational opportunities can be extended by up to 30 percent by diminishing the wastage resulting from dropout and repetition rates and under- utilization of physical space. In addition to qualitative improvements that indirectly improve the efficiency of the system, the mission proposes the following direct measures: (a) a modification in the student-flow policy to reintroduce some kind of automatic promotion in the early grades. (b) a study of the examination system and development of validated achievement and diagnostic tests. (c) development of methodology and facilities on the basis of large class size (40-50 students). (d) a higher utilization of physical facilities by rotational scheduling and double shift. 13.43 The productivity of the system may be improved by implementing the following proposals: (a) an employment policy study that analyzes development policies and their implications for employment, and projects manpower needs. (b) the expansion of nonformal education programs beyond functional literacy to encompass a wide range of training schemes, coor- dinated by rural development centers, wherever available. (c) the introduction of mobile training units for short and specific courses. - 336 - (d) diversification of the curriculum of general education for career orientation and preparation. 13.44 On the more specialized level the mission recommends a flexible and diversified approach to training that includes: (a) vocational schools that prepare manpower with a wide range of skills derived from specialties in related industries. (b) smaller vocational schools attached directly to industries and enterprises and which can respond in a flexible way to *the changing needs of those enterprises. (c) project-related training ranging from special courses to on-the-job training. 13.45 The measures proposed in the areas of equitable expansion of educa- tional opportunities, and efficiency and productivity of the system, necessi- tate basic modifications in the qualitative components of the sector. The mission recommends the following: (a) the development of a community-oriented basic education curri- culum with a core of skills needed by the rural population. (b) a revision in teacher education to prepare primary school teachers for rural education and community development. (c) the establishment of a coordinating body between the Ministry of Education and the Ministry of Higher Education to coordinate general operations,,with special emphasis on teacher education policy and supervising its implementation. (d) the development of the Academy for Teacher Educators into an institution of research and development either within the Kabul University or a larger national institute. 13.46 The implementation of the educational strategies requires effective and efficient educational management. In addition to the recommendations related to public administration as a whole, the mission makes the following proposals for the education sector: (a) the development of an organizational scheme to consolidate the developmental activities of the Ministry of Education, modernize the management and implementation functions, and upgrade the status and activities of the planning unit by transforming it into a staff office and a secretariat for a national educational planning board. (b) the development of the provincial offices of education by raising the qualifications and rank of the education officers (from rank 3 to 2) and equipping the offices with a cadre of - 337 - professional staff capable of implementing provincial educa- tional policy. Health and Family Planning 13.47 In the health sector there are three main problems to be tackled. First, there is excessive orientation of the health program towards curative, medicine. Second, health services are inefficient and of poor quality. Third, only a small percentage of the population is covered by health services at present. 13.48 The major share of public health expenditures is for curative pur- poses, treating many illnesses that patients are equally likely to contract again once cured. This represents an enormous waste of limited health re- sources, and calls for more effective programs to attack the causes of such illnesses instead of merely treating the symptoms. At the root of most such health problems is contaminated water, yet the public is not fully aware of its effects. The mission recommends the following: (a) A major expansion of the drinking water program. For urban areas this would entail lower levels of service through more use of standposts rather than household connections, but with service to many more of the small towns than is currently envisaged by the Central Authority for Water and Sewerage (CAWS) - all the 26 provincial capitals should be covered during the Plan period. In rural areas the program must be expanded dramatically. The goal of 25 percent rural coverage is appropriate, but to achieve it the Environmental Health Department (EHD) will need greatly increased resources. (b) To expand the manpower available to EHD, a training program for 12th grade school-leavers should be set up. The Rural Develop- ment Department has had considerable success in using these school graduates to carry out programs. (c) To expand the financial resources available to EHD (including funds for operation and maintenance), it should be funded as a special program directly from the Ministry of Finance, in the same way as the Malaria Eradication Program is now provided with funds. This will prevent its allocation being diverted to other uses within the Public Health Ministry. (d) To insure continued viability of the program, a beginning should be made with creating a pilot semi-autonomous regional water agency outside Kabul, funded either through water rates, or where water supply is through standposts, through a general cess. (e) A three month study should be carried out with expert assistance to prepare a campaign to educate the public on the importance of clean water and sanitation practices to good health. This - 338 - would include health education programs in school curricula, expanded radio coverage, newspaper coverage and film shows, posters in public places, etc. 13.49 A number of Ministry of Public Health (MOPH) activities are plagued by inefficiency and low quality. These are directly related to each other, poor quality keeps many potential patients away, which results in low utiliza- tion and hence inefficient use of facilities such as hospitals, Basic Health Centers and scarce medical manpower. To alleviate these problems and increase the role of the MOPH, the mission proposes that: (a) The proposed drug information and logistics system be imple- mented as a matter of priority to insure that hospitals and health centers outside Kabul are assured of regular and ade- quate drug supplies. (b) A fee for services be introduced, particularly for drugs. Even nominal charges would greatly increase the efficiency, of use of facilities and drugs, while providing a useful source of income for some of the Ministry's programs. (c) The hospital expansion programs should be focussed on fewer, better equipped hospitals. The objective should be one hospital to a province, and the existing 10 bed hospitals should be converted into Basic Health Centers, unless they are the only one in a province in which case they should be upgraded. This would bring the number of hospitals down from 64 at present to 48 at the end of the Plan, with however, only a 6 percent reduction in the number of beds. 13.50 The low level of population coverage would greatly improve if more people within reasonable access to a Basic Health Center or hospital out- patient services, did indeed make more use of them. A major reason for low usage at present is lack of medicines. The introduction of Village Health Workers' (VHWs) appears to be an imaginative approach to the problem of increasing the coverage of the main system and spreading health education. (a) The implementation of the VHW program should be expedited. A timetable should be prepared giving the phasing of training programs and a plan should be put forward for supplying VLWs with basic drugs. The proposal that the program should be paid for by the village through a small charge for drugs, for which the VLW would be accountable, is an important step in the right direction. 13.51 A further crucial constraint on the quality of MOPH health service is the quality and quantity of manpower. Currently training involves very little practical work and as a result doctors are ill-prepared to treat the many varied illnesses they encounter. There is also a great shortage of medical staff in rural areas, which has resulted in extremely inequitable distribution of manpower between Kabul and the rest of the country. To help alleviate these problems, it is proposed that: - 339 - (a) More practical work be included in doctors' training programs. A short 3 month study should be carried out, to come forward with recommendations as to how this should be achieved. (b) Training facilities for female staff should be expanded and many more women should be admitted to doctor training programs. To alleviate the problems of assigning female staff to rural areas, the current programs to give traditional midwives and female school-leavers a basic nursing training and then return them to their original village, should be stepped up. (c) A special program for hospital administrators' training should be set up, since this is likely to be a critical area of man- power shortages during the Plan period. To help in assigning increasing numbers of staff to the rural areas, the following suggestions might be implemented: (a) A regulation that no doctor would be considered eligible for promotion to the highest ranks of the civil service without having served at least three years at a Basic Health Center and/or provincial hospital of less than 200 beds. (b) A post allowance equal to 25 percent of salary for all medical personnel stationed outside Kabul or their home province, with additional housing allowances or provision of Government housing. 13.52 The final area of health which needs to be tackled is the family guidance program. The Afghan Family Guidance Association is a success story and merits continued support. The time has come, however, to think in terms of a wider reach for family guidance activities. (a) A family guidance department should be created in the MOPH, to carry out studies, conduct pilot projects and use the demographic data available from the Census to prepare the detailed surveys which will be needed to implement family planning. (b) The leadership of the country should give public support to the principle of protecting the health of mothers and children by spacing child-births through the use of family planning devices. (c) All medical personnel should be trained in family planning motivation, services and treatment of side effects. This is particularly important for the VLWs. (d) A study should be carried out on how to increase the avail- ability at the local level of family planning pills and devices. These could be distributed through the regular retail network as is done in some countries to supplement the supplies through the health system. - 340 - (e) Information on family guidance programs should be disseminated through the education system. All high schools should provide this information to students. There should also be more news- paper and radio publicity about the program. Economic Administration and Planning 13.53 Afghanistan has come a long way from the time when development con- sisted of projects conceived, prepared, implemented and financed by foreign aid donors. At present development is truly a partnership between the country and its friends. There is a healthy recognition on both sides that the admin- istration is inexperienced and the supply of qualified personnel is limited. The progress towards overcoming these weaknesses has not perhaps been as rapid as both Afghanistan and the aid donors would have wished. Now that the Govern- ment has laid the basis for political reorganization, it is to be hoped that it will turn its attention to the need for administrative reorganization. In the context of a determined effort to upgrade the administration, financial re- sources, which have been a secondary consideration in the past are likely to emerge as an important constraint on Afghanistan's growth. The basis must be laid in the early years of the Plan for insuring that Afghanistan does not solve one problem, simply to be overtaken by another. 13.54 It is true that Afghanistan faces serious shortages of well-trained administrators, but it is equally true that poor use is being made of those it has. In general, morale in the administration seems low, motivation is inade- quate, there is not a sufficiently clear sense of what needs to be done, junior officials are given little responsibility and take little initiative, and the administration is out-of-touch with the needs of an essentially rural popula- tion. The most important single step which needs to be taken to address these problems, is to raise salaries. It must be recognized, however, that while improved salaries are a necessary condition for better performance, they are not sufficient in the face of an outdated administrative system which does not reflect the needs of a modern development effort. Better salaries will need to be supplemented by a large number of other changes in the system. 13.55 Salary levels of civil servants have declined by about 50 percent in real terms since the late sixties. While it is true that there remains an excess supply of applicants for civil service jobs, due to the lack of alterna- tives within the country, nevertheless low salaries have contributed to low morale and petty dishonesty. Consideration should be given to increasing salaries, but only if the increase is associated with the other administrative reforms proposed below. The increase should address three specific problems. First, there is the lack of sufficient range between the lower and higher salary levels. As a result increments tend to be too low to provide reasonable incentives. Second, the salary structure does not provide adequate recognition for post-graduate studies and training. At this point in time those who have been trained abroad are not only an extremely valuable asset to Afghanistan, but command a market overseas on the basis of their training. It would not re- quire paying salaries competitive with those in the USA or Germany to persuade Afghan graduates to return, but there would be some monetary recognition of their extra value to their country. Third, there should be compensation for - 341 - the considerable hardship and cost of being posted away from Kabul. Civil servants can expect to spend most of their working life in Kabul and naturally establish their homes and their families there. Assignments out of the city, crucial though they may be to the country's development, are inevitably un- popular and often mean living in small towns without rural areas, if more civil servants experience them at first hand. The mission proposes the following: (a) A general salary increase of Af 2,400 per annum for all civil servants; this is approximately equal to the value of the subsidized wheat currently made available. (b) A graded increase in salaries ranging from 15 percent at the lowest ranks to 30 percent at the highest ranks. (c) A special increase for all those who have successfully completed two years of post-graduate studies or training (including those such as doctors who have completed six years of study). This might begin at 20 percent of salary for someone entering the civil service and taper down to 15 percent at the highest level. (d) A special allowance for postings out of Kabul and out of the home province of the civil servant. These might be graded according to the relative hardship, but for simplicity's sake a flat 25 percent of salary is again suggested. 13.56 The effect of these changes would be a 75 percent increase in salary in the extreme case of a civil servant filling all the criteria. The average increase however is unlikely to be more than 50 percent, i.e. restoring salaries to their late-sixties levels in real terms. To defray the expense of this in- crease it is proposed to: (a) Withdraw the issue of subsidized grain to civil servants and insure that the pricing of services in Kabul (public transport, power, water, etc.) is economic. The other benefits which the Government provides such as lunches, transport facilities, health insurance in some provinces, pensions and training, should also be examined with a view to judging their appro- priateness. These salary changes could be implemented as part of the 1979/80 budget which would give the necessary lead time for preparation and classification. Higher .salaries should also make possible the adoption of much tougher regulations on dealing with corruption. A high-level committee should be organized to make recommendations on appropriate enforcement of such regulations. 13.57 Associated with higher salary levels, there needs to be reform of the inadequate personnel practices. This needs to begin at the stage of recruitment. The Government must dissociate itself from the commitment to find employment for all graduates. For the most part it will be able to absorb the increase in manpower, but present practices encourage an excess of generalists and draw - 342 - people away from other potentials which may be equally productive from the national point of view. (a) The new civil service and administrative reform department which has been recently set up should be given responsibility for all recruitment of generalists for Government posts. All staff records should be kept by this department which should also handle inter-ministerial transfers. When Ministries seek new staff, files on suitably qualified applicants should be sent from the personnel office, and the Ministry should make its selection. Those who will supervise the new employees should be asked to prepare a job description of what he or she will be doing. Ministries themselves should have responsibil- ity for specialist recruitment within their areas of competence. (b) The Government should announce that with the growth of the economy during the Plan period, new job opportunities are' expected to open up in many areas including the private sec- tor. For this reason, and given the growth of University education, the Government will no longer guarantee employment in the public sector for all graduates. 13.58 The next stage is to create adequate motivation for staff in the Ministries. A starting point is the need for a job classification system which defines what is expected of Ministry officials. Almost every report on the administrative system in Afghanistan has stressed this and yet nothing has so far been done. A full job classification may be too complex at this stage of the game and should perhaps only be introduced gradually. Other aspects of motivation will include the higher salaries referred to above, and greater decentralization of the decision-making process, giving junior officials real say in the administrative process. It is proposed that: (a) The heads of departments, i.e. the President level of the administration, be asked to submit a description of the function of their department, indicate how all staff members fit into this function, and forecast how their work will change during the Plan and the additional staff they will need to perform it. These reports should be submitted for the consideration of the Deputy-Minister and Minister within six months, and consolidated into a brief report to be submitted to the cabinet three months later. (b) The Departments of Administration which are present in every Ministry, should be downgraded to a record-keeping office. Individual departments should take over the functions of budgeting and personnel for their own needs. Staff from the Administration Departments should be reallocated to other departments. - 343 - 13.59 One of the key issues in Afghanistan's administration is the question of how to make rural development activities more effective. An indispensible element of this in the mission's view is to decentralize the administration. The following proposals would assist in achieving this: (a) In addition to the 25 percent salary supplement for those posted out of Kabul and also out of their home province, special provision for housing should be made, either through construction of Government housing or payment of rental allowances. (b) No further promotions should be made to rank 4 or higher unless the official concerned has spent a minimum of three years in the administration outside Kabul. (c) Certain taxes should be designated as provincial and the provincial administration should be permitted to allocate the proceeds of these without reference to Kabul, though subject to audit procedures of course. (d) Provinces should be given a certain amount of funds for normal contingencies - replacement of spare parts, price increases over the budget estimate, etc. (e) The implication of this report is that there will be a vast increase in the numbers of staff and their responsibilities at the local level. In these circumstances there is scope for a study of how best to organize local administration, to be carried out by the Ministry of the Interior, with expert assistance. 13.60 The system of budget and audit is at the root of many of Afghanistan's administrative problems. The processes are often carried out in a legalistic way which makes a mockery of good sense. The mission met many government officials who had bitter stories to tell of the difficulties of getting funds released for the simplest purposes, or control procedures which made implementa- tion all but impossible. There have been many studies of these problems and perhaps this is a case where the desire to evolve an ideal system is standing in the way of a slightly better one. The latter might include the following elements: (a) Ministries should be permitted to transfer the savings in one budget category for use in others, at the Minister's discretion. (b) The technical review of the development budget should be done every six months rather than every quarter. Funds could still be released at quarterly intervals, but release should be automatic for the second and fourth quarters. This would reduce the onerous reporting re- quirements to twice a year instead of four times a year. - 344 - (c) The audit should be limited to five years in the case of the ordinary budget and five years or the life of a project if it is longer, in the case of the development budget. (d) A three months' study should be undertaken on setting up training programs for auditors and developing new guidelines for the Department of Audit. These should be implemented over the following nine months. Expert assistance would be required for both the study and the implementation. It is important that the scope should not be over-ambitious, but simply to move the attitudes and practices of auditors from 'preventing pilfering to encouraging implementation. (e) A start should be made in one Ministry with the introduction of Program Budgeting. The Ministry of Water and Power might be a suitable candidate for the introduction of this approach. 13.61 Once again there has been a fairly extensive literature on planning in Afghanistan. The prescriptions are well-known and the problem is to put them into practice. The planning units in the key sector ministries are woe- fully weak and are not really capable of identifying and preparing projects for the Plan. The Planning Ministry itself is understaffed and coordination is very weak in fields such as manpower for example. One recurring recom- mendation which perhaps derives from the success of the approach in Malaysia, is that a Vice-President of the country be given responsibility for the key economic ministries and their coordination. The mission doubts that this is a panacea though in the context of the many other measures that need to be taken it would more than likely be a positive step. The machinery of the Supreme Economic Council, if activated, however, could go a long way to filling this gap. It would be a mistake however to crowd all the energies for reform of the planning system into this one innovation. The program should be built up as follows: (a) The planning units in the Ministries of Agriculture and Industry especially must be upgraded through definition of their tasks and expert assistance. Yet upgrading does not mean that they should do more, only that they should coor- dinate better and be capable of evaluating and monitoring, and of advising the Minister. The implementing departments themselves should be doing the planning, e.g. the Livestock Department must plan livestock development, not the Agricul- tural Planning Department. Each of the operating departments in Ministries should have planning divisions and staff of their own. (b) The Planning Ministry itself should set up a Department of Policy Studies to look at major economic issues which arise and to provide a focus for review of the incentive system, price policy, exchange rate policy, etc. - 345 - Statistics 13.62 Many recommendations in other parts of the report refer to admin- istration and planning in relation to other sectors or problems. Particular attention should be made of the statistical system which is elaborated in Volume II. The poor data base is a tremendous handicap to both administration and planning in Afghanistan. The recommendations in Volume II would provide the basis for more effective data collection and use than is the case at present. 13.63 The key problem of Afghan statistics is the lack of comprehensive economic and social data, including especially the national accounts. Im- provement of basic data system to provide such statistics is a long-term process. Since, however, no proper economic analysis and planning could be done without such information, the mission recommends that highest priority should be given to: (a) the undertaking, with expert assistance, of a National Economic Survey, an integrated program of properly designed small sample surveys and collection of administrative data, for the purpose of compiling global benchmark estimates of the Afghan economy, which should be conducted during 1978-79 for its proper linkage with the population census data. 13.64 The recently created (1972) Central Statistics Office (CSO) was charged with centralization of all statistical activities and coordination with various ministries for providing usable statistics for planning and ad- ministration efficiently. (See Statistical Law of Afghanistan, Vol. II.) The CSO has still to make a mark in these fields, since it has not embarked on any well-thought out statistical program except for the population census due to be carried out in 1978. The mission, therefore, recommends that: (a) The CSO should actively promote the Professional Statistical Commission, established by Law, for guidance on user-orientation of-Statistics, formulation of statistical programs, and in- creased cooperation with and participation from the Government agencies. (b) Further, the CSO should take immediate steps to strengthen the following presently viable statistical data collection processes for better quality control and coverage: general government accounts including both central and municipal accounts, accounts of public enterprises, wholesale and retail prices, outputs of agricultural crops and industries, and external trade and balance of payments data. To upgrade the capability of the CSO staff it is also recommended that: (c) The CSO recruit qualified statisticians and improve training facilities both in-house and through fellowships abroad. - 346 - Domestic Resources 13.65 A great deal of success has been achieved in increasing domestic resources since 1973. For the future, the scope is somewhat more limited. With regard to indirect taxes these are mainly related to external trade. Although trade is projected to grow rapidly in the future, it will be mainly through exports, and imports of capital goods needed for the development pro- gram. The share of relatively highly taxed consumer goods imports is likely to decline. To some extent this will be substituted by excise taxes on domestic producers, but overall indirect taxes will be hard put to maintain the same real growth rate as in the recent past. With regard to direct taxes, private traders and industrialists have been squeezed hard and at present the prospects for higher taxation are not good without seriously damaging incen- tives. 13.66 This is not to say that there is no scope for increasing public savings. On the contrary, the mission has identified one area with a great deal of potential. This is the group of subsidies which are at present given indiscriminately to a wide range of commodities and activities. Many'of these subsidies are for items which may be expected to grow rapidly over the Plan period. The real growth of subsidies would thus be much faster than income and their maintenance might in future be at serious cost to the development program. For this reason the mission urges a serious evaluation of the large number of controlled prices and subsidies. (a) Gasoline: In most countries motor fuel is a major source of Government revenue. It can and should be so in future in Afghanistan. A substantial rise in the controlled price would neither affect the development effort nor the living standards of the poor. It is proposed that the price be doubled in stages in real terms during the Plan period. It can be compensated in part by the removal of tolls. (b) Sugar: The sugar subsidy made sense during the recent very high prices, but this is no longer the case. Nor are substan- tial price increases projected in future. In the circumstances the concept of a sugar subsidy should be abandoned and considera- tion should also be given to handing over Government monopoly procurement of sugar to the private sector. (c) Coal: The development of coal which is to take place during the Plan period, should be on the basis of realistic prices rather than necessitate constant subsidies to producer enter- prises. Coal is effectively priced at half the equivalent for firewood and a quarter the equivalent of gasoline. In the long run coal-heating has an important role to play in Afghanistan and it is important to get the price right now. (d) Wheat for civil servants: The issue of subsidized wheat to civil 'servants is an anomaly which will not be needed in the - 347 - context of the general salary increase which has been proposed above. Civil servants can then purchase their wheat at the bazaar. (e) Bus travel: The recently initiated bus service in Kabul is heavily subsidized. Efforts should be made in the context of financial accounting to insure that operating costs including depreciation, are covered, though this may be a matter of efficiency rather than higher fares. (f) Agricultural inputs: It is important that the pricing of agricultural inputs be kept under careful review. The most important issue relates to water, where the absence of any charge at present often leads to extremely wasteful use. The principle of a variable water charge needs to be introduced to prepare the ground for its full implementation later. (g) Higher education: One of the greatest future problems will be the system of completely free higher education. This is almost by definition an extremely regressive program in terms of income distribution in present-day Afghanistan. University graduates receive free tuition, in many cases free board and lodging, and monthly pocket money as well. Students should be asked to indicate the income and assets of their parents when applying for university and some charges should be levied on those who can afford to pay. A similar approach should be followed with other institutions of higher education. (h) Drugs and hospital services: Once again the impact of free supplies of drugs and hospital services is at this point in time mainly to benefit the urban groups who are relatively better off. A system of charges related to ability to pay is again suggested. In addition a nominal charge for all drugs should be instituted. 13.67 One of the reasons why there has been insufficient focus on these subsidies and their serious cost to the country is that Government accounting obscures rather than illuminates their impact. It proved impossible for the mission to obtain figures and proper accounts for many of these items. The Government as a result never really has the facts in front of it in order to make a decision. The mission proposes that: (a) The Ministry of Finance set up a working party to propose a format for presenting subsidies in the Budget documents which would enable them to be explicitly identified. The new format should be introduced in the 1979/80 budget. 13.68 Reference should be made here to proposals which are elaborated in the sections dealing with private and public industry sector. With regard to the private sector, the need for less arbitrary administrative procedures - 348 - for income tax collection including a statute of limitations and right of appeal should be stressed. In the long term, insofar as this helped to promote private investment, it would result in more rather than less tax collections. With regard to the state enterprises, nothing can be done until there is some clear idea of what their financial performance is. It is critical that they prepare timely financial accounts. In addition, however, the budgetary treatment of state enterprises is incomprehensible. Some items appear to be included on a gross basis, while in other cases they appear on both sides of the accounts. (a) All state enterprise accounts should be included in the budget on a net basis. A separate annex should show their detailed performance. An annual financial report on public enterprises should be prepared for consideration by the Melli Jirgeh which would show what their operating subsidies or alternately their profits were. 13.69 The development of banking in Afghanistan has lagged since the early days of Bank-i-Melli. If private agriculture and industrial enterprise is to be harnessed for development, then the banking system must play a more effec- tive role than hitherto. (a) A study should be undertaken by the banks with expert assis- tance on how they can increase their lending activities. There should be a special focus on the issue of relaxing the collateral requirements which are far too stringent, and the possibility of adopting the pioneering approach of AgBank which in effect accepts the guarantees of the borrower's neighbors. A program of publicity should be introduced acquainting potential borrowers with the facil- ities available. (b) It is essential that banking be regionalized. All the banks should permit loan authorizations by branch managers for small loans and establish a regional hierarchy whereby district managers can approve larger loans until only the very largest must be referred to Kabul. Banks must expand their regional network, establish branches at bazaars, simplify their procedures. Managers of individual banks should be asked to set targets for lending and performance should be measured against these. (c) It should not prove necessary to subsidize interest rates to attract borrowers. There is no evidence that the level of interest rates is any disincentive whatever at present. On the contrary certain rates are palpably too low. Thus the 6 percent rate for small industrial loans by IDBA and 8 percent for agricultural borrowers are both below the highest deposit rate of 9 percent. It is recommended that the lowest lending rate be fixed at 10 percent for both IDBA's small borrowers and the agriculture sector. - 349 - (d) The Government has followed imaginative approaches on attracting deposits and there are proposals at present to introduce prizes and so on. Increasing deposits particularly term deposits could be very important in reducing the liqiduity overhang which might have serious inflationary effects in the future. The spread of branches into the regions could be particularly important here and the banks should be asked to present proposals for the spread of branches during the Plan period, and also suggestions for promoting deposits. External Resources 13.70 The external sector represents perhaps the most promising avenue of growth which is open to the country. The growing markets in neighboring countries are a potential which Afghanistan can exploit to overcome the dis- advantages of its own limited market and the high transport costs associated with trade with more distant markets. However, it will require effective investment programs and a sensible policy framework to make use of the new opportunities. In earlier parts of this chapter, we have discussed the sectoral investment programs which would enable these export markets to be tapped. The emphasis below is therefore on the supporting framework of trade policies which should be constructed. 13.71 One of the key elements in maintaining the growth rate of exports which is crucial to Afghanistan's development program is exchange rate policy. The present volatility and level of the exchange rate may not prove appro- priate in the longer term. The mission proposes that: (a) During the course of calendar year 1978, the Da Afghanistan Bank be authorized to purchase foreign exchange from the bazaar in sufficient quantity to move the exchange rate up towards Af 50 to the dollar, i.e. a devaluation of 10 percent - 15 percent. (b) In future the Da Afghanistan Bank should pursue a policy of purchasing foreign exchange from the bazaar whenever the rate falls below Af 48 to the dollar, and selling foreign exchange when the rate rises above Af 52 to the dollar. Obviously there may be times when this will not be a reasonable objective, but domestic monetary policies should be related to the desired level of the exchange rate, rather than the other way around as at present. (c) It is important that at least some of the effective devaluation be reflected in the earnings of export producers. This is espe- cially the case for cotton, where variable tax rates can be used to keep the price level for the producer stable in real terms. 13.72 A second vital aspect of export development lies in the development of marketing arrangements with Afghanistan's neighbors. Any recommendations that are made in this area will of course be limited by political relationships. - 350 - No timing is therefore proposed for such arrangements, but the mission stresses their critical importance in the longer run. (a) Discussions should take place with Iran concerning long-term (10 years) access of Afghanistan's meat, fruits, vegetables, and possibly cement in the 1980s to the Iranian market. In return Afghanistan should be willing to give some preferences to Iranian manufacturers in areas where no Afghan production is planned. (b) Discussions should take place with Pakistan concerning mutual control of illegal trade which is damaging to both countries. In Afghanistan's case,, its infant industries cannot compete with cheap Pakistani goods which are often dumped on the Afghan market as a medium of capital flight. In Pakistan's case, smuggled re-exports from Afghanistan and capital flight through the bazaar, drain away scarce foreign exchange. (c) The Department of Export Promotion should institute studies and send delegations to the Gulf countries, to examine the potential for Afghan exports and to secure contracts for long-term supply. 13.73 The subject of Afghanistan's labor exports to Iran and the Gulf countries is very controversial and the mission has much sympathy with the desire of the Government to discourage the 'brain drain' it often involves. In the case of unskilled workers in Iran however, the benefits may be con- siderable in terms of the on-the-job training which Afghan workers may receive and the remittances they bring back. Such migration may help to modernize attitudes and make those who return more receptive to change. At present most of the migration is illegal - passports are costly and difficult to obtain. The demand appears to have stimulated a great deal of dishonesty among concerned officials. The illegal workers have no protection abroad and are victimized by dishonest middle-men and employers. In the circum- stances it is urged that: (a) Agreement be reached with the Government of Iran that the tazkirah or identity card which every Afghan male and many females as well, must have within the country, be recognized as a legal document for travel to Iran, subject to the issue of a separate, simple form and the payment of a small fee at the border. This would not of course be a valid travel docu- ment for other countries and it could also be limited to surface travel. 13.74 One of the important development potentials in the long run is tourism. Policies with regard to tourism development go far beyond the sub- sector itself and perhaps need more argumentation than can be provided in the present Report. The recommendations are based on those of a recent Tourism Sector Review undertaken by the Bank. The need for better coordination of tourism activities seems paramount. - 351 - (a) As mentioned earlier, a new Ministry of Transport and Tourism should be created with two Deputy Ministers, one with respon- sibility for Tourism and Civil Aviation. (b) The new Ministry should be asked to review within six months the many recommendations made by foreign advisers in the tourism sector, and report to the Cabinet at the end of that time as to which of these it will implement, and why it does not propose to implement the others. (c) Private enterprise in the tourism sector should be encouraged, by licensing private tour operators in competition with the public Afghantour, and where appropriate by selling off public sector hotels. IDBA should be encouraged to provide finance to the tourism sector. 13.75 With the huge increase in trade projected over the Plan period and beyond, transit arrangements become crucial. The existing transit facilities may prove inadequate and it is unlikely that the development plans of Iran and Pakistan take adequate account of the likely increased transit needs for Afghan commodities. While the capacity of the USSR's transport system is indeed vast in relation to Afghanistan's requirements the emerging pattern of growth of trade may make this route less important in the future than it is now. The Government has made an excellent start with the setting up of a trucking company making use of TIR facilities. If bottlenecks are not to develop during the Plan period, however, it will be necessary to: (a) Undertake a study to identify the expected patterns of trade during the 1980s and review the adequacy of the facilities available for the movement of such trade. Identify the investments or institutional arrangements which will need to accompany this expansion. The study would require both expert support and agreement with the countries of transit as to access to relevant data. The study should be coor- dinated by the Ministry of Commerce. 13.76 Another aspect of trade policy relates to the customs duties. The level of tariffs at present provides ample protection against legal imports. The problem of Afghanistan's infant domestic industries springs from smuggled goods and this must be tackled through other means suggested in 13.72 above. By and large the Government has been careful not to raise import duties to levels which encourage evasion. This is also the case for export taxes where some review may be called for, however, in view of continued smuggling of items such as live animals and carpets. Perhaps the most unsatisfactory aspect of the present trade regime is the outright banning of the export of certain items. The mission proposes that: - 352 - (a) Textile exports should be permitted, but subject to an export tax. The export tax should be calculated to reflect the export tax on ginned cotton, i.e., the share of cotton in total production cost times the share of the tax in the export sale price of cotton. This would prevent inefficient textile exports based merely on the availability of a cheap domestic raw material. (b) Vegetable exports should be permitted subject again to export taxes which would permit the domestic price to remain at .reasonable levels but still allow for some upward pressure in response to price levels in Iran and the Gulf countries. 13.77 With regard to the institutional support for trade, the progress to date has been encouraging. The Karakul Institute is a successful proto- type which can be implemented in other commodity sectors. The Department of Export Promotion has provided useful information on markets and production potentials, and the new Export Promotion Bank should make an important contri- bution once it gains in experience and confidence. There are still problems however. Above all something must be done about the red tape which surrounds trading activities. This involves a high cost to trade both in terms of time and also through the petty corruption which it encourages. It is proposed that: (a) The Ministry of Commerce set up a working party with rep- resentation from the private Chamber of Commerce, to make recommendations on simplifying the procedures for exports and imports. Their recommendations should be proposed to the cabinet for introduction before the end of 1978. (b) The Department of Export Promotion should undertake a review with short-term expert assistance, of the possibility of extending the organization of private producers of the same type as the Karakul Institute, to other commodities as well. 13.78 The final area of significance relates to foreign aid. In the past, Afghanistan has been largely indiscriminate about accepting foreign aid, while on the other hand there has been an almost total refusal to allocate any of the country's own foreign exchange reserves to investment projects, no matter how crucial they have been. As the planning process matures, there must be a move away from this approach. It will mean more realistic planning, i.e., decisions on which projects are really central to the strategy and which are luxuries. It will mean better integrated planning to insure that for example supporting infrastructure is available at the same time as production facili- ties. It will mean more careful evaluation of project returns in relation to the often onerous lending terms imposed by some donors. - 353 - (a) Afghanistan should identify a core Plan, related to different levels of external financing. It should indicate its willing- ness to match donor funds for important projects with foreign exchange of its own. This is particularly important now since the present information suggests a serious shortfall in aid availabilities. (b) Decisions should be taken on what debt service terms are accept- able. Some recent aid offers have implied terms which create too great a debt service burden in later years. Such terms should only be accepted for projects where exports to the donor country would be adequate to meet the debt service, while still leaving an adequate financial margin to compensate domestic production factors. C. A Macro-Economic Scenario for Afghanistan 13.79 Although the data base is so unreliable, it is useful to attempt to derive some estimate of the impact of these proposals over time. The compo- nents of GDP in Table 77 below have been projected exogenously on the basis of the mission's best judgments concerning 'efficient' performance in imple- menting the recommendations. The term 'indicative' is almost too strong to use for the projection, and perhaps describes the outer limit of the credence which we would propose to attach to it. The key to the projection is the growth in agricultural value-added which of course makes possible more rapid growth in other sectors. Thus, despite its growth, agriculture's share in GNP declines from nearly 50 percent at present to just over 40 percent during a ten year period. An attempt has also been made to project some of the in- dicators of the extent to which basic needs are being met. The projected increase in income per capita over the years between 1976/77 and 1985/86 is almost exactly one-third i.e. an additional $58 in 1976/77 prices. While this would mean little if concentrated in the modern sector, if the increase in income can be spread over the population as a whole, and particularly the rural population, it could mean the elimination of absolute poverty in Afghanistan in terms of the adequacy of purchasing power for food, clothing, shelter and fuel. It would not however mean that basic health and education needs were met. Even with great improvements in efficiency more than half the population would still not have access to modern health services, while sub- stantial numbers of children would still not be attending primary schools. Afghanistan would be well on the way, however, to achieving its objective of a better life for all its people. Table 77: MACRO-ECONOMIC PROJECTIONS: 1975/76 to 1985/86 1975176 1976177 1977178 1978179 1979/80 1980/81 1981/82 1982/83 .1983/84 1984/85 1985/86 A. Valued Added Items (billion Afs., 1975/76 Constant Prices) Agriculture 53.8 54.9 56.1 57.3 58.1 61.4 65.1 69.4 72.3 75.9 79.7 Handicrafts 7.7 .7.9 8.1 8.3 8.5 8.7 8.9 9.2 9.4 9.6 9.9 Industry and Mining 3.2 3.4 3.5 3.7 3.9 4.3 4.7 5.7 6.4 7.2 8.0 Services Private 3.8 4.0 4.2 4.5 4.7 5.0 5.3 5.6 5.9 6.2 6.5 Public 4.8 8.4 8.9 9.5 10.0 10.6 11.3 12.0 12.7 13.5 14.3 Construction 2.2 2.5 2.8 3.1 3.5 4.0 4.6 5.3 6.1 7.0 8.1 Transport and Communications 3.5 3.6 3.7 3.7 4.0 4.2 4.4 4.6 4.9 5.1 5.4 Trade Services 11.8 12.8 13.9 15.1 16.4 18.0 19.8 21.8 24.0 26.4 29.1 Housing 5.0 5.3 5.6 6.0 6.4 6.9 7.5. 8.1 8.7 9.4 10.2 Others 1.1 1.1 1.1 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.3 Depreciation 5.3 5.7 5.9 6.1 6.5 6.9 7.3 7.7 8.2 8.7 9.2 Factor Income 2.3 2.1 2.4 2.5 2.6 2.7 2.7 2.8 2.9 3.0 3.1 4 Indirect Taxes (+) Subsidies (-) 4.1 3.3 3.4 3.6 3.7 3.9 4.0 4.2 4.3 4.5 4.7 GNP at Market Prices 108.8 115.3 119.6 124.5 129.5 137.8 146.8 157-6 167.0 177.7 189.5 B. Population (million) 13.5 13..8 14.1 14.4 14.7 15.0 15.3 15.6 16.0 16.4 16.8 GNP Per capita ($) 1461/ 1762/3/ 179W 182)/ 1871/ 195?/ 2022/ 215?! 222A/ 231l/ 240-/ Annual Growth Rate in GNP - 6.0 3.7 4.1 5.5 6.4 6.5 7.4 6.0 6.4 6.6 C.- Basic Needs: 3/ Absolute Poverty Income ($)- 81 Health Services (% with access) 13 14 16 19 22 27 32 38 40 42 45 Average Life Expectancy.(years) 35.3 35.6 35.9 36.2 36.5 36.8 37.1 37.4 37.7 38.0 38.3 Primary Education Enrollment (%) 30 31 33 36 39 43 48 55 60 65 70 Notes: 1/ Afghanistan's average 1975/76 exchange rate. 2/ Afghanistan's average 1976/77 exchange rate. 3/ consistent with the Bank Atlas figure of $160 (rounded from 164) for 1976. - - 355 - 13.80 The growth path delineated in Table 77, represents what could be achieved in the context of a major effort to carry out the measures which we have proposed in this Report. It implies also a considerable acceleration in Afghanistan's savings and investment efforts. The resource implications of the projection are shown in Table 78 below. These figures are derived in many cases through arbitrary assumptions. The usual strictures about treating the figures with caution apply even more strongly in this case. Table 78: EXPENDITURE FLOWS 1975/76 TO 1982/83 (US$ millions in 1975/76 prices) Annual Growth 1975/76 1982/83 Rate % GNP 1976 2863 5.5 Net Factor Income 41 80 10.0 GDP 1935 2783 5.3 Consumption 1776 2494 5.0 (Public) 151 226 6.0 (Private) 1625 2268 4.9 Savings 160 289 8.8 (Public) 53 103 10.0 (Private) 107 186 8.2 Investment 189 588 17.6 (Public) 116 427 20.5 (Private) 73 161 12.0 Exports 249 353 5.2 Imports 278 652 13.0 Net External Finance 29 299 - The implied increase in investment is substantial. It would rise from 10 per- cent of GNP in 1975/76 to over 20 percent in 1982/83. The savings effort re- quired to finance such an increase does not seem unreasonable however. Savings would rise from about 8 percent of GNP in 1975/76 to about 10 percent in 1982/ 83. This implies a marginal savings rate of about 15 percent. This should indeed be achievable in the context of a strategy to promote private savings and investment on the one hand, and reduce subsidies financed by the Govern- ment budget for consumption on the other. The increase in per capita private consumption of about 20 percent combined with income redistribution as a con- sequence of land reform should permit a substantial reduction in absolute poverty. The target for external finance implies a very large increase, but this is consistent with the improvements in absorptive capacity which would take place if there is the requisite effort to carry out the recommendations. The constant price data makes Afghanistan's projected external performance look rather worse than it is, since a substantial terms of trade improvement is expected. In addition exports rise very rapidly after 1982/83 as new capacity comes onstream. - 356 - XIV. CONCLUSIONS 14.01 In 1971 a World Bank mission wrote of the pervasive "disillusion- ment about the past and pessimism regarding the future" in Afghanistan. They concluded that "such pessimism is justified as even in areas where development activities were undertaken, with heavy inputs of capital investment and for- eign advice, returns have been dismally low". Afghanistan was at its nadir. Two years of drought had led to a doubling of wheat prices and large numbers of livestock were being slaughtered. The balance of payments was in dire straits and the Government requested a moratorium on its debt payments. The mission identified four elements which underlay the critical situation; first, the ineffectual administration and the scarcity of competent officials; second, the inability to "devise or follow an effective development strategy"; third, the poor financial management and inadequate tax effort; and fourth, the failure to manage the external sector so as to provide sufficient incentives for exports. The Report states that "This list could be lengthened. Suf- ficient has been said, however, to show that there are very substantial obstacles to progress and that those responsible for the conduct of develop- ment are certain to be faced with great difficulties in their efforts to proceed effectively and expeditiously. It is clearly impossible to remove all the obstacles in a short period of time". 1/ 14.02 The pessimism of 1971 was not solely a reflection of the weaknesses of the management of the development effort however. There was also a percep- tion of Afghanistan as a country with limited development potential in the longer term. In this respect at least, there is no longer cause for pessimism. In 1977 the economic outlook gives promise that substantial progress can be made in the next ten years towards the goals of higher income levels and meet- ing the basic needs of the population. Let us spell out the changes which have led to this conclusion. In 1971 it was difficult to identify the elements of a growth strategy for Afghanistan. The major emphasis was on the achieve- ment of food self-sufficiency. The tiny domestic market offered little prospect for industrialization; indeed most of the obvious potentials had been tapped through the large state enterprises which were poorly run and operating at low levels of capacity utilization. While exports did offer some potential, Afghanistan seemed unlikely to be able to compete effectively given its distance from world markets. 14.03 In the interim major changes have taken place. The harvests of 1972-1976 have made it clear that Afghanistan is indeed already self-sufficient in food in normal years. Increased yields are needed not to insure food self- sufficiency in drought years as well, but to enable valuable irrigated land to be diverted to higher value cash crops with export and industrial poten- tial. Food security can be achieved through programs of imports, domestic procurement and storage, so that the economic impact of the occasional drought year is minimized. The steady rise in prices of primary commodities, has benefitted Afghanistan's exports. The oil price rise has benefitted nearby 1/ Op. cit. pp. 1 and 2. - 357 - markets which Afghanistan is almost uniquely well-placed to serve with agricul- tural products. A strategy which is led by agricultural exports, increasingly in processed form, has already begun to take shape. Rising prices for minerals have made the exploitation of Afghanistan's reserves commercially viable in a number of cases, so that the export drive can proceed along a broader front. The export opportunities are supplemented by good prospects for import substitu- tion of some items. The substantial inflow of remittances from Afghan workers abroad should insure buoyant domestic demand in addition to attractive export markets. 14.04 Whether these opportunities will be taken, depends to a large extent on the Government. Again there is room for a positive assessment. The key agricultural institutions, the AgBank and the Fertilizer and Seeds Corporations, have registered real progress and can confidently be expected to make a major contribution to agricultural growth in the years ahead. The trend of Govern- ment policy on foreign exchange management has been in the right direction. There has been no attempt to reduce the openness of the economy, and the ade- quacy of export incentives has been kept under careful review. The progress in increasing tax revenues has been impressive, though there is a worrisome trend towards large hidden budgetary subsidies. Capacity utilization in the state enterprises has risen substantially. The rural development program gives promise of a genuine impact on rural living standards. The Government is committed to land reform and greater equality of income distribution. Indeed for almost the first time in Afghanistan's history, there is no ques- tion of the Government's commitment to the objectives of economic development and higher living standards for all. 14.05 And yet, the optimism must remain measured. The obstacles to development remain daunting. The civil service is still not development oriented. Most administrators are unmotivated, poorly trained and hampered by an archaic civil service system. There are shortages of almost every cate- gory of trained manpower, and even those who have been trained, have been poorly trained. There are any number of pending decisions and proposed reorganizations, and little sign of movement on them. The public sector is strained to the limit by its present responsibilities and what it will need to do in those areas of the economy and the society in which only the public sector can act. Yet Afghanistan's leadership has not yet taken steps to harness the potential in the private sector, both domestic and foreign, to supplement the reach of the public sector in promoting the development strategy. The dualism of Afghanistan persists; the modern sector concentrated in Kabul continues to draw the lion's share of infrastructure and attention; the regions with their predominantly rural economies, languish by comparison. The Plan which has been prepared seems to draw its inspiration too much from the dreams of the future, and too little from the harsh realities of the present. 14.06 The Government of Afghanistan has a heavy responsibility. The con- tinuation of the present living standards cannot be countenanced; that only half of those who are born live beyond the age of 5, and even those only have a life expectancy of 50; that 10-12 percent of the population can read or write; that one-third of the population live in absolute poverty; that in years of drought, widespread hunger visits the land. A commitment to change - 358 - these things means more than public speeches and impressive Plan documents. It means that solid programs are worked out and that due attention is given to their implementation. We do not ask that "all the obstacles should be removed in a short period of time". We ask for a careful definition of social and economic objectives, and a genuine effort to achieve them. 14.07 You will read this Report as the long winter draws to an end. The families will be huddled around the cooking fire. The nomad women and children will be weaving fine carpets and rugs. The passes of the Hazarajat will be closed. Soon it will be spring and as soon as the lambs are strong enough the nomads will. leave the plains and begin the climb over the foothills and moun- tains of the Hindu Kush. The journey is long and difficult. The mountains are steep and the rivers are swollen by the melting of the snows. The flocks need water and grazing. The youngest child, born only last year, has fever and needs rest. There is a valley ahead where the flocks will have water and grass, where the women and children can rest, and where the youngest can grow strong again. There is a valley ahead. I BR D 13204 r e2
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Afghanistan - Journey to economic development (Vol. 1 of 2) : Volume 1 : The main report
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