Putting the Cart Before the Horse: A Look into Afghanistan’s Decision to Join the WTO

By Ryan Lasnick

Having completed the bulk of the accession formalities, Afghanistan is scheduled to become the thirty-fifth least developed country (LDC) member of the World Trade Organization (WTO) and only the sixth LDC to join since the organization’s inception. The country received approval to join the WTO on December 17 and will have until June 30 to ratify the agreement. LDCs often lack the capacity, both economically and governmentally, to make the necessary changes that WTO accession requires, which is why only six have joined in the past 20 years. Beyond this initial difficulty, the economic disadvantages for an LDC joining the WTO have been shown to be significant; yet Afghanistan has decided to accede despite these hazards. This leads to the question: Why has Afghanistan seemingly ignored conventional wisdom and decided to join the WTO?

ARCHIVES (OLD PHOTO DATABASE)

Men involved in a money exchange business in a market in Afghanistan. On December 17, 2015 Afghanistan was approved to join the WTO and will have until June 30 to ratify the agreement. Photo by Gerard Carreon for the Asian Development Bank.

Since 2002 the United States has poured over $100 billion into state-building and establishing democratic institutions in Afghanistan, but little has changed. In fact, the influx of money has created new revenue channels for an existing and growing oligopoly. In the absence of a free market with functioning state regulation, the oligopoly and local power holders have determined access to economic resources in many markets across the country. Lack of interest and capacity by political authorities has created weak formal economic institutions, largely unaccommodating economic policies, and regulatory failure.

Despite these complexities, the government of Afghanistan has decided to join the WTO in the hope that the stamp of approval by the global trading body will bring legitimacy to the war-torn country beyond an increase in trade. While there are certainly benefits for Afghanistan joining the WTO, they are not as numerous as the government currently believes. Afghanistan’s WTO accession is a case of Afghanistan’s policymakers putting the cart before the horse by trying to join a prestigious economic club while the economy still struggles to enjoy any sustained growth.

Afghanistan’s WTO accession process required extensive reform to a tariff regime that provides more than 35 percent of the country’s current tax revenue. Lowering these tariffs in industries such as agriculture, which currently accounts for 86 percent of Afghanistan’s exports earnings, will decrease Afghanistan’s national budget and make it more difficult to pay for basic public goods and services. Other industries in Afghanistan such as commodity manufacturing, which only has a 14 percent share of export earnings, are far too primitive to handle the competition that would be caused by further integration into the WTO.

The economic benefits of joining the WTO are not as black and white as acceding developing countries are led to believe; in fact, the World Bank estimated that the global gains from WTO liberalization are about $96 billion, with only $16 billion going to the developing world. A 2009 study by the International Labor Organization (ILO) and the WTO shows that the costs of WTO membership for LDCs could be extensive; total tariff losses for developing countries under proposed agreements are estimated to be as high as $63.4 billion and will make further taxation even more difficult.

Afghanistan is landlocked, but located at the heart of the Silk Road. It is a burgeoning hub of trade and commerce for Central and South Asia, and as such relies heavily on international and regional trade. Afghanistan’s four biggest trading partners are all within the region, with Pakistan, India, Iran, and China accounting for more than 75 percent of all trade flows. Prior to the accession process, Afghanistan negotiated a Transit Trade Agreement with Pakistan, a Preferential Trade Agreement with India, and numerous regional agreements such as the South Asian Association for Regional Cooperation (SAARC). These agreements have contributed to more than a 300 percent increase in trade between China and Afghanistan in the past three years, as well as a nearly $2 billion increase in cross border trade between Afghanistan and Pakistan since 2006. These bilateral trade agreements have achieved much progress for Afghanistan, but there is still a large trade gap that remains. The potential for a massive increase in trade due to infrastructure investments by China likely plays a significant role in the timing of Afghanistan’s accession.

Afghanistan’s government argues against the economic dangers of accession, claiming that inclusion in regional and global economic bodies such as the WTO is a value in itself for an isolated country such as Afghanistan. The Afghan government hopes that the trade body’s seal of approval will provide a lift for the country, which gets three-quarters of its gross domestic product (GDP) from foreign aid and derives more than half of the remainder from the production and export of opium and related products including heroin. Afghan President Ashraf Ghani said membership would create “a catalyst for domestic reforms and transformation to an effective and functioning market economy that attracts investment, creates jobs, and improves the welfare of the people of Afghanistan.”

By joining the WTO, Afghanistan hopes to become part of a system of member-based rules and procedures that provides the type of predictability and stability that are the basic building blocks of attracting long-term investment. The belief is that WTO accession shows that Afghanistan is committed to playing by the rules of the multilateral trading system. Afghanistan’s Minister of Commerce and Industries Humayoon Rasaw stated that “the adherence to WTO agreements [is] critical for strengthening the rule of law, increasing transparency, and building the foundation for sound economic development in Afghanistan.” Joining the WTO could enhance Afghanistan’s stature on the world stage through having a voice at the negotiating table and allow the country to create economically stronger ties with regional and international bodies. The government understands that joining the WTO will not accrue immediate financial benefits to Afghanistan, but accession has the potential to extend far beyond concrete benefits. The WTO shows that Afghanistan, after years of corruption and war, is attempting to get on track.

However, even if WTO membership opens up new markets and supply chains for Afghanistan, few will want to engage on an economic level while the country is too unstable to sustain such transactions. Afghanistan’s economy is a complex mix of informal, formal, illicit, and aid-sustained elements, with the private sector contributing a mere 10 to 12 percent to the country’s GDP, a product of a decades-long mix of protracted conflict, low state capacity, foreign interference, and external aid dependence that will be slow to change, even after accession to the WTO.

Afghanistan would be in a stronger position to attract investment if it took the time to encourage political and economic stability and establish its independence from foreign aid and support before it enters the WTO. As one of the poorest countries in the world, struggling to recover from conflict, Afghanistan has more pressing priorities than WTO accession – primarily, development and poverty reduction.

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