Certain themes and dynamics are so prevalent across the analytical framework that they bear special mention. They can be thought of as layers. For example: this Diagnostic is organized so that the typical components of a healthy civic society and a prosperous economy are discussed discretely and then related to each other where appropriate. This structural format forms much of the Western mental construct about civil society and an individual’s relationship to the state and other organizations. Concepts such as “church and state,” “public and private,” and “principle and agent” are so ingrained in the West that they are often deemed to be actually distinct entities and concepts. In Afghanistan, this is not the case. There, different relationships, authorities, sources of law, duties, and responsibilities are often conceptualized as a seamless whole – as “society.”
Thus, in order to appreciate the true impact of the unique themes that permeate the findings and recommendations in this Diagnostic, it is important to keep in mind that they not only overlap and affect all of the separate analytical areas, but each other as well. For example, a lack of literacy creates a dependence on oral transmission for information, usually from a trusted source who has some familial and, quite likely, religious stature. In this case, information about something as mundane as a market price may come blended with a religious and micro-community component that would not otherwise be available to everyone reading the same secular newspaper.
Against this backdrop, a number of cross-cutting themes emerged during the course of this Diagnostic. They may be characterized as follows, and are discussed in turn: (a) the tension between the urgency of creating a legal framework that will support a genuine market economy, and the legitimacy of laws that are enacted without a broad-based effort to build consensus and educate stakeholders; (b) the grave challenge of rebuilding implementing institutions; (c) the scarcity of knowledge and understanding underlying key supporting institutions; and (d) the clear opportunities that currently exist in Afghanistan’s business environment.
A. “Urgency vs. Legitimacy”
Many development professionals take the view that Afghanistan needs modern civic institutions in order to build a vibrant and self-promoting middle class, and that development aid should be used to build those institutions. A second vision of long-term, sustainable development holds that successful civil societies emerge from knowing and participatory consent between the governed and the system of government. EIt contends that legitimacy of law, and ultimately the long-term prosperity and stability of a nation, depend on the degree to which its citizens have committed to the program by either creating it in their own vision or by being an assenting partner to the compromises that resulted in its ultimate form.
At the time of this Diagnostic, ten commercial laws had been prioritized for enactment over the next calendar year through the Afghanistan National Development Strategy, an effort subscribed to by the government but largely led by the donor community. These laws are supposed to undergo a process of review by the Afghan Ministry of Commerce and the Taqnin (the legislative drafting unit of the Ministry of Justice) and to be reviewed by the U.S. Embassy in Afghanistan and other U.S.-sponsored advisors. Revisions are to incorporate comments from each of those reviews, when necessary. In January 2007, four of these laws (the Company Law, the Partnership Law, the Arbitration Law, and the Mediation Law) were signed into effect by the President during the Parliamentary recess – an act not without its controversies. The Contracts Law, according to most observers, is next in line. The remaining five laws slated for near-term enactment include three intellectual property laws (Copyright, Trademarks, and Patents), a Law on Agency, and a Law on Standards.
The urgency with which this agenda is being pursued contributes to the following observations about the ultimate ability of the emerging legal framework to be considered legitimate by the Afghan people. As detailed over the course of this Report:
• The Company Law, signed by the President in January 2007, was written by foreign lawyers who did not spend substantial time in Afghanistan and received little (or no evident) review or input from Afghan companies, businesspeople, or professional persons such as lawyers, accountants, and judges. Local actors, including a ministry senior lawyer and lawyers who represent a major Afghan company, reported that they are unaware of the new law or its contents, that they have not seen a draft of it, and that they would like to have had – and would now like to have – substantive input.
• The Contracts Law was drafted chiefly by outside advisors in 2003 and 2004. Since that time, local lawyers, judges, businesses, law professors, and other critical constituencies have not been consulted about its contents – or even informed about it – to any significant degree. The new law reflects this lack of consultation insofar as it does not yet provide any guidance about the process for contract enforcement. Furthermore, the law was not constructed in conjunction with a meaningful plan for implementation, including how law students and existing lawyers will learn to write and enforce contracts. In the Afghan marketplace, there continues to be only nominal use of contracts, and those companies that do use them have little appetite for taking disputes to court. How the new law will integrate with this reality has not been planned for in formal terms.
• A review of the three draft intellectual property laws reveals that, three years after they were prepared by outside experts, there is no local consensus concerning how they are to be implemented or enforced. In fact, the draft laws at once suggest the establishment of a single office to handle all types of intellectual property, while simultaneously indicating such possible sources of discrete administrative authority as a new Trademark Office, a copyright office within the Ministry of Information and Culture, and, for registration of international patents, an office to be named later.
• Although certain of Afghanistan’s newer laws or draft laws exhibit strong compliance with the traditions and expectations embodied in Sharī’ah, a common theme during the course of this Diagnostic was that many legal drafters – foreigners in particular – appear to either disregard Sharī’ah entirely or regard it as irrelevant in their drafting efforts. In discussions with members of the Afghan academic, legal, and business communities, and with various international consultants, voiced the following concerns:
- Most outside consultants consider the Constitutional requirement of Sharī’ah compliance as merely political and not a substantive legal requirement;
- The typical international advisor is not an expert on Afghan culture, law, or Sharī’ah compliance;
- Even those laws that mention Sharī’ah compliance do so in a merely perfunctory manner and not as a substantive consideration;
- Sharī’ah is a factor in a number of commercial areas and, if it is not considered adequately, the implementation and long-term use of the commercial laws is jeopardized; and,
- As one business leader in Kabul put it, “Afghanistan is not America, Pakistan or Europe.” Sharī’ah and other Afghan moral, religious, and sociological factors need to be taken more into account in drafting new laws.
A contrasting example of how outreach and consensus-building can lead to a greater sense of legitimacy can be found in the process used in the development of the land policy, which will ultimately incorporate land-related law, regulations, and practices. The policy was developed with the participation of relevant government representatives, including officials at the Ministries of Urban Development, Agriculture, and Justice, mayors and other local government officials, private investors, and community members. It proceeds with assistance and coordinating help from the USAID-sponsored Land Titling project. A draft of the policy was approved in February 2007 by the three ministries identified above and the Economic Committee of the Cabinet, whence it is expected to go to Parliament for approval. The various constituencies have been working together in this process for more than a year with multiple meetings and workshops at which there was “plain talk and argument” (quoting one interviewee). According to interviewees, consensus and compromise views have emerged on many issues. Thus, to a far greater extent than the ANDS-prioritized commercial laws, Afghanistan’s land policy offers significant potential for public understanding, support and compliance.
In short, and in light of these observations, critical questions arise: Is Afghanistan in such a state of emergency that what are essentially “foreign” concepts and institutions should be substituted for home-grown ones that might sprout later? Will these institutions and concepts last? Are they appropriate (e.g., compliant with Islamic Law)? Will they emasculate the legislature? Will they alienate the people? Is some kind of foundation – wherever it comes from – a necessary predicate to the ultimate creation of indigenous Afghan institutions? Thus the argument unfolds in terms of urgency versus legitimacy, and these questions form the core of the debate running every day through every level and facet of the Afghan development effort. Do we give them what they need, or help them build what they want, or both?
B. Implementing Institutions: The Challenge of Rebuilding
Afghanistan’s suffering in recent years places its implementing institutions – including ministries, courts, and other major agencies – at a stage that is almost worse than having nothing at all. Observations of the state of various institutions include the following:
• Afghanistan is currently rebuilding its courts. Though once respected for efficiency and general trustworthiness, years of Russian interference, civil war, and Taliban domination took a severe toll on the judiciary. At present, there is widespread perception of corruption in the formal court system, along with indications that the perception is not unfounded. Starting judges earn $50 per month – far below basic needs – yet over 700 candidates applied recently for 170 judicial vacancies. Anecdotal evidence suggests that the positions are highly desired because of their potential for earning rents, and some judges have indicated that positions are for sale.
• Various ministries discussed in this Report are responsible for drafting and implementing new laws. Many of these ministries simply lack the human capital and resources to realize their nearly overwhelming agenda. Due to habit, personal agendas, and lack of resources, information-sharing among the ministries is said to place grave constraints on progress.
• With respect specifically to trade, the Ministry of Commerce and Ministry of Foreign Affairs take the lead in matters of international trade. At the time of this Diagnostic, however, the respective roles of each and the lines and parameters of authority were unclear. While the Ministry of Foreign Affairs, for example, initially took the lead in implementing the WTO accession process in 2003, that responsibility shifted to the Ministry of Commerce in July 2005 because literally no action had been taken (not even meetings). Of course, the bi-cameral National Assembly (the Wolesi Jirga, or House of People, and the Meshrano Jirga, or House of Elders) will have a legislative role in international trade matters, but this power has not yet been exercised has yet to be seen. Similarly, the role of the President in international trade and treaties, as executive, is anticipated to be considerable, but specifics are still unknown. Often repeated during the course of the Diagnostic was the suggestion that accession to the World Trade Organization will have to wait until more of the institutions that will necessarily be involved – from the Ministry of Commerce to the Customs agency and others – are more able to comprehend, integrate, and implement a program of WTO compliance.
• The Afghanistan Customs Department (ACD) is the principal government agency for border control and is part of the Ministry of Finance (MOF). In general, these institutions are weak, lacking in coordination, inadequately resourced, and marked by corruption. Although Afghanistan has made some progress toward stability, these agencies lack competent staff to provide even basic services and functions.
On the other hand, certain institutions set a promising stage for the future:
• The Afghan Investment Support Agency (AISA) arranges the registration of most companies with the commercial court, issues investment licenses, and maintains a license database. AISA is the primary and best investment-information and investment-support body in Afghanistan. Its staff is knowledgeable and helpful, and it is a good resource for significant-sized potential investors, both for company registration and for navigating the system generally. It has an attractive website. In the future, it could serve as the “one-stop shop” that oversees a company’s application for specific industry and sectoral licenses. It would undoubtedly also be a good source for comment on the text of the new Company Law.
• Afghanistan has a long cultural tradition of dispute resolution through local councils known as shuras (Dari) and jirgas (Pashto). While there are some historical differences between the two, both are traditional councils of elders that can be convened by parties to resolve conflicts. The types of cases brought before these councils tend to deal primarily with family law (particularly marriage), inheritance, and local property disputes, but commercial claims also appear on occasion. The shura is the only adjudicatory system in Afghanistan that enjoys the respect of the general population. It is used by Afghans because it works better than the courts: shuras are perceived to be cheaper, faster, more just, and more trustworthy. As a consequence, for commercial purposes, most Afghans prefer the shura system to the judicial system. Even upper-level members of the business community in Kabul reported the use of shuras to resolve commercial disputes.
In general, for most practical purposes, Afghanistan lacks the basic institutions upon which a middle class depends. Laws, courts, schools, credit, electricity, information, security, transportation, and other institutions are impaired. Commerce mostly occurs at either end of the spectrum – informal micro-enterprise (survival trading and subsistence farming) or large international investment – at the expense of the middle. This gap is not unrecognized, and progress is being made; however, the importance of building the Afghan middle class cannot be overstated. It is axiomatic that a middle class is critical to the stability and prosperity of a modern nation. The middle class are the managers, producers, regulators, traders, teachers, voters, and consumers that make a market economy function. However, as a result of the fundamental weaknesses in implementing institutions, the middle class currently have nowhere to thrive in Afghanistan.
C. Supporting Institutions: A Scarcity of Knowledge
Returning to the theme of “layers,” almost three decades of authoritarian (Communist and Islamist) rule and war have shaped and informed the values, beliefs, and practices of the Afghans who survived it. The post-authoritarian “hangover” has left the average citizen, and the supporting institutions usually constructed by a society to help economies grow, deficient in personal and economic initiative. Years of having to ask permission and of harsh punishment for unauthorized actions, however insignificant, have given rise to a “decree” mindset in which people will normally not act unless explicitly or implicitly told that they may do so. Authoritarian rule is also partly responsible for the primacy of personal authority over positional authority – a handicap in trying to build effective institutions governed by the rule of law. Another legacy of authoritarian rule is the seemingly intractable combination of business and government, both in reality and in the minds of Afghans. The control levied on information by the authoritarian regimes in the recent past and the danger presented by standing out from one’s peers are also partly to blame for the general lack of information present in Afghan society at large. For example, the media is typically feared and shunned by businesses and government alike – there is little to no appreciation of their potentially positive contribution. Another common paradigm is that – whether from family, tribe, government, religious sources, international or donor inputs, or a combination thereof – rules and laws come from “somewhere else.” There is consequently little sense of individual participation in civic society. The notion that people could decide for themselves, via representative government, what rules to follow, does not exist.
There is a marked lack of information in Afghan society generally. Some of that deficiency is attributable to the authoritarian experience described above, while some of it is attributable to the lack of literacy and education discussed below. Much of it is likely attributable to the lack of information itself. Afghanistan is not a culture of widespread information. There is no commonly held expectation of knowledge or feeling of entitlement to know things beyond the information incident to daily life and religion. From that lack of expectation seems to have followed a stunting of curiosity. There are few available statistics or even raw data relating to business, government, or the economy. Rumors are rampant, but they have not fueled the market for “ground-truth.” Television and radio are dominated by entertainment programming and there is little clamor for the government to produce information as a public good – or even to disseminate it incident to its daily operations. There is, moreover, no credit information bureau, despite the fact that bad-credit risks are known to many in the banking industry and that they represent a threat to the profits of all bankers.
There is a significant lack of human capital in Afghan society today. Educational institutions fell victim to the civil wars following the Soviet withdrawal in the late 1980’s and were then systematically savaged by the Taliban in the late 1990’s. (What remains of the educational infrastructure is largely colored by Communist doctrine held over from the 1970’s and 1980’s.) The national literacy rate is less than 40%. This means that, aside from radio and television (which both depend on technology and electricity), there are no media for sharing a common understanding. There is little appreciation for an objectively neutral authoritative text – such as a law or tax regulation, because most must have it read to them. There is also painfully little quantification in a society where numerical literacy is not any more widespread than written literacy. This lack of numeracy has major implications for the growth and government of a complex society, from management and promotion of a market economy to the collection, recordation, and expenditure of tax revenue, to even the simplest of business decisions. There is also a lack of understanding about the role of public servants. Government was long a place to accumulate wealth and power at the expense of attention to fiduciary responsibilities.
The lack of human capital is pervasive and its effects are multi-fold. For example, a dearth of professors who can teach market economics results in a concomitant lack of businessmen, government functionaries, intermediaries, and price-wise consumers who make up the functioning market economy that is so critical to national self-sustainment. The lack of domestic human capital also fuels imports of human capital from neighboring countries for critical functions, thereby decreasing the “Afghan-ness” of the economy and marginalizing what would otherwise be an indigenous middle class (with perhaps predictably negative consequences to government stability).
Women comprise almost 50% of Afghanistan’s population – and they work. While businesswomen in the formal sector do exist, most women work in the home without remuneration. Barriers to their entry into the mainstream of the economy are numerous and include the following: social constructs, traditional gender roles, domestic chores that remain labor intensive due to lack of modern appliances, lack of higher education, and a literacy that is less than half that of males. Pioneering female entrepreneurs are mostly widows who are thus able to negotiate and otherwise speak for themselves in the business context. Banks, government offices, and other institutions critical to business are getting used to dealing with women professionally. The greatest hope for bringing this underutilized part of the workforce to greater capacity may lie in the reinvigoration of the carpet industry and agricultural processing.
D. Opportunities for the Future
Although much of the information pertaining to Afghanistan’s business environment does not paint a positive picture, the Diagnostic team found many promising areas of change, growth, and opportunity. These include the following:
• Sharī’ah-based lending may represent a powerful force behind economic growth in the future. Loans are structured to assure compliance with restrictions imposed by Sharī’ah prohibiting the collection of conventional interest. Lenders have been able to obtain fatwas assuring borrowers that a type of transaction is in compliance with Sharī’ah. A typical Sharī’ah-compliant loan is a murabaha loan, that is, a “buy/sell” arrangement. Under such an arrangement, the lender buys the item to be financed directly from the vendor. The lender then resells it to the borrower at a mark-up. Because the lender only derives a profit from the mark-up on resale and is paid that amount without interest, there is no “riba” or interest involved in the transaction, and it does not run afoul of the Sharī’ah prohibition from the collection of riba.
• Another area that has seen immediate acceptance and growth is the leasing of equipment. This has obvious advantages. First, this simplifies repossession rights because the title stays in the name of the lessor-finance company. Second, there is no interest involved (at least not outwardly) and therefore, the transaction does not violate the Sharī’ah principle against charging interest. Even though in substance these transactions are economically identical to secured financing, their being classified as leases gives them advantages in marketing and enforceability.
• The new Law on Contracts is clear, well written, and consistent with both Sharī’ah and international best practices. When the process of implementation begins in earnest, it has the potential to serve as an excellent tool for teaching the fundamental principles of modern contract law.
• A significant opportunity relating to Afghanistan’s Counter-Narcotics Strategy is the development of large-scale agri-business. Given the products produced in Afghanistan before the conflict and since, the potential for such enterprise certainly exists. Of course, it is difficult to suggest this opportunity against a backdrop of constant droughts, harsh winters, wars with the Taliban and Al Qaeda, religious conflicts, lawlessness, and underdeveloped transportation, electric, and sewage infrastructures. Yet agri-businesses are beginning to flourish, the rule of law is improving, finance systems are evolving, and goods are beginning to move.
Indeed, there is, within these examples and in many others set forth in this Report, hope in Afghanistan.
