Tuesday, April 8, 2008

Rubin: Who Lacks Capacity? Using the Skills of the Opium Trade for Counter-Narcotics

Foreign aid donors and consultants working in Afghanistan often complain that Afghans “lack capacity” and suggest programs of “capacity building” to enable Afghans to develop their economy and state. Such programs train Afghans in internationally accepted standards and practices, on the assumption that mastery of these standards and practices constitutes “capacity.”

Unfortunately many of these internationally accepted standards and practices do not work very well in Afghanistan, since they presuppose a set of interoperable systems that do not exist. Hence the need to train Afghans to fill out project proposals for donors soon mutates into demands for a different type of education and legal system, which in turn press Afghans to abandon their languages and political institutions. Since the international standards and practices don’t work very well anyway, Afghans resist abandoning their identity and accepting that they “lack capacity.” Mutual incomprehension and resentment result, if not worse.

Sometimes when a consultant tells me that Afghans lack capacity, I try to imagine my interlocutor being forced to survive in Uruzgan province with two jaribs of land and a goat. I wonder if this person would be capable of transferring billions of dollars from undocumented workers in the Persian Gulf to families living in remote villages with no banks or telecommunications. I wonder if he could transform a local conflict incomprehensible to outsiders into a million dollar business funded by superpowers that h have been convinced they have existential stakes in the outcome. I wonder if he could smuggle emeralds out of Afghanistan to buy weapons and ammunition in Ukraine and transport them across seven closed borders into the Panjshir Valley. I wonder if he could create a multibillion dollar a year industry in one of the world’s poorest countries with no government by turning those handicaps into assets in a world with an insatiable demand for illegal addictive substances.

A brief examination of the people of actually existing Afghanistan indicates that they do not lack capacity. If they lacked capacity, they would be dead by now. But they have developed capacities to deal with their actual situation over the past several decades. During that time, the ability to apply for a grant from USAID was not particularly useful. Intelligence agencies are much less demanding of financial accountability and deliverables.

Instead, Afghans developed capacities that enabled them to survive and in some cases prosper under conditions of insecurity and high risk. In order to transfer money from migrant workers to their families, they developed extensions of the longstanding havala system. This system, which long took advantage of the movements of nomads and traders to transfer letters of credit between hinterlands and commercial hubs, has adapted to the age of telecommunications. Money can be transferred electronically from an account in Saudi Arabia to an account in Pakistan. A dealer who has been contacted by either a personal emissary or mobile phone withdraws the cash. A personal emissary, a traveler, nomad, or trader, or a mobile or satellite phone call courtesy of the CIA and other intelligence agencies, who supplied them to commanders, can inform the recipient, who can come to the city or town to collect. Or the agent can use the cash to purchase goods in a market center and then transport them for resale at a profit in the destination area. He transfers the original amount to the recipient and keeps the profit and costs as his fee. All of these transactions rely on networks of social capital underpinned by kinship, religion, fear of retribution, and other forms of reciprocity that operate in the absence of a state or without support from it.

Among the legacies of decades of conflict in Afghanistan were hyperinflation, a debased currency, and the circulation of multiple series of banknotes of different origins. Printing currency was a way for leaders with weak administrations to leverage a degree of international recognition into flows of cash, and they did so from the late 1980s on. Therefore, as part of the process of establishing peace, stability, and accountability, the Bonn Agreement of 2001 called on the interim administration of Afghanistan to establish a new central bank to emit currency in a transparent, accountable fashion. In 2002, when the Afghan government decided to implement this measure by demonetizing the old currency and issuing a new one printed with advanced technology, the IMF told the government that Afghanistan lacked the capacity to carry out such a change, as it had no functioning banking system. The IMF recommended dollarization of the economy instead.

Under the leadership of Minister of Finance Ashraf Ghani, the Afghan government rejected this argument and succeeded in changing the currency within a few months (see the account by Ghani and his collaborators in their chapter in this book). The exchange was completed without incident in early 2003. The International Security Assistance Force, then under the command of Turkey, refused to provide security for an operation that required the transport of billions of dollars worth of cash through a war-torn impoverished country with no functioning police or courts. USAID promised to supply helicopters to transport the currency notes but lacked the capacity to deliver them, as it was unable to obtain the required insurance. As international actors either lacked or would not use their capacities, Afghanistan carried out this change using its own capacities. The major obstacle encountered was the lack of physical capacity to burn the old notes as quickly as they were turned in.

How did they do it? The Afghan government used and developed the existing capacities of the society, rather than assuming that these old capacities either did not exist or had to be replaced with new, imported capacities. The Afghan government convened the havala dealers and worked out an exchange system with them, tapping into their tremendous knowledge of the functioning of money markets and monetary transfer systems in Afghanistan, as well as their connections to traders and other economic actors throughout Afghanistan.

Since international actors were unable or unwilling to assist with security, the finance minister requested the assistance of the minister of defense. At that time the Minister of Defense, Marshall Fahim, commanded the militias who had fought the Taliban, not a professional army. He and the Minister of Finance, Ashraf Ghani, were political opponents on many issues, including the issue of the future of the militias that had fought the Taliban. Nonetheless they were able to reach agreement on the currency exchange on the basis of national interest. The leaders of the militias in question are now members of parliament or government officials, and their militias have been largely demobilized. The currency has remained stable, and Afghanistan’s monetary reserves have increased from virtually nothing to several billion dollars.

Many of those demobilized have entered the opiate industry. This industry, whose yearly export value of over $3 billion is estimated to equal half of the licit GDP in value and to constitute the bulk of the cash economy, is also a major reason that the new currency has remained stable and that Afghanistan’s foreign reserves have increased.

After ignoring the opiate economy for several years during which the US backed protectors of drug trafficking as allies in the war against the Taliban and al-Qaida, policy has now shifted. The entry of the US into counter narcotics policy, like its entry into other areas of “nation building” originally rejected by the Bush administration, is welcome, as it holds out the potential for the needed funding and political support for the difficult endeavor of converting Afghanistan’s economy from an illicit one depending for protection on illegal armed groups into a licit one relying on the apparatus of the rule of law. This transformation is fundamental to the establishment of peace and stability in Afghanistan.

Let’s look at the drug economy from a different angle, as a high-capacity adaptation to indescribable devastation. This suggests that, like the transition to a new currency, the transition to a new, licit economy should use the existing capacities developed over the past few decades. Entrepreneurs have established a multibillion dollar a year business in Afghanistan. They have leveraged the country’s main weaknesses – poverty and the lack of security and rule of law -- to make billions by producing an illicit addictive substance for which there is an insatiable demand. They have created a value chain starting with the extension of agricultural credit to farmers in the most remote areas through a network of traders. These traders offer futures contracts for the product to farmers, guaranteeing them cash to feed their families through the winter and a market for their finished product. Through these futures contracts farmers are guaranteed both cash income and a market, simultaneously.

Small industrial enterprises, dispersed in remote areas to avoid detection, transform this raw material into heroin, a high-value, low volume product, using state of the art technology. This technology requires the importation every year of thousands of tons of acetic anhydride, a substance not manufactured in Afghanistan. Someone is paying suppliers in the neighboring countries for this industrial material and smuggling it into Afghanistan to supply the labs scattered throughout the country. Traders in turn purchase the refined material or pay the labs to process raw materials and then arrange to transport the product across the border through the use of ethnic and tribal ties as well as various types of militias. To ensure the settlement of disputes and the security of the operation, the economic actors all along the value chain have established a shadow system of governance, involving local councils, bribed officials at all levels of the government, and flexible arrangements with a large variety of armed groups.

Such a criminal industry was the only possible large-scale economic activity in the past several decades, and a large portion of the Afghan population has participated in it. Thus a country that long largely relied on subsistence farming for food production has now developed a massive sector of commercial agriculture for the international market, with the associated financing, insurance, production, agricultural extension, marketing, and trading activities.

David Mansfield, who has spent over a decade of field research studying the opium industry in Afghanistan, characterizes this industry as an adaptation to a situation of high risk. Many aspects of the business model, and in particular the way that relations between traffickers/processors and cultivators are structured, function in such a way as to reduce and spread risk among participants in the industry.

Discussion of alternative livelihoods often is reduced to crops for farmers. But the opium economy creates more non-farm than farm income. Some of that income goes to traders who purchase opium in villages or in bazaars. Many of these traders also act as lenders and purchasers of futures contract.

These small and medium traffickers correspond to the hawala dealers in the currency exchange. They have the detailed knowledge of the credit and marketing needs of the farmers that any new rural economy would need in Afghanistan. Rather than eliminated or targeted, they should be integrated into new institutions that make use of the skills and networks they have developed.

For instance, they could be offered an amnesty in return for capitalizing new rural credit institutions. Each trader/lender will have the authority to make loans for a set of defined purposes for which the institution is established, including futures contract purchases of any licit agricultural good. In order to reduce risk, the government with the support of International Financial Institutions should establish some kind of loan guarantee or insurance scheme to encourage a higher volume of credit without exorbitant rates. The subsidy, guarantee, or insurance should assure that the cost of borrowing from this new institution will be significantly less than the cost of contracting debt through the salaam system or with opium as collateral.

The agricultural lenders would need technical advice, but they could certainly also supply technical advice, given their experience. In provinces where little or no opium is grown, there will still be traders or landlords who operate as lenders. Some of them could be recruited and new employees trained to create a credit and investment institution similar to what the opium economy has established elsewhere.

This is just a crude idea -- but let's develop some more. But I wonder if we have the capacity....


Peter said...

This "crude idea" of yours is the best idea I have encountered in a very very long time.
Let's put some effort to develop it further!

Peter Unnerstedt, Sweden

Anonymous said...

Brilliant, simply brilliant.

Akmal said...

In Dari we call an article like this “Degar Andishi” which can be translated into English as “thinking different of other”. It shows that Mr Rubin’s mind is not totally occupied with media jargons, and that he has his own discerning analysis.

Unknown said...

Even in the military terms, Ahmad Shah Massoud defended northeastern provinces against a coalition of the Taliban, Al-Qaeda, and Pakistani militia troops with nor more than $ 2 million budget a month.

BeautySeeker said...

Excellent point. Capacity is missing only when defined from a specific perception.

Anonymous said...

Educated people in any nation are not lacking in capacity. It could be, however, that they are lacking in experience that we westerners take for granted. As an example, educated Iraqis are as bright and capable as educated Canadians. They have, however, no experience in decision-making. The reason for this is quite simple. In Canada, making the wrong decision is unfortunate but has no personal consequence; in Iraq, making the wrong decision might have cost you your life. Under those circumstances, decisions don't get made. It'll take generations for Iraqis to overcome this discomfort with decision, and blaming it on a lack of capability is probably just evidence of a lack of funadamental understanding on the part of the western critic.

Anonymous said...

How to counter a thriving underground economy:

1) minimize the cost of product. In the case of opium and heroin, put out a lot of bad juju. Flood the market (with trademarks) of bad drugs.

2) protect the crops. Place troops, or people on the ground to have dinners, breakfasts, and lunches with farmers, have them assist in defending the territory and family. After all, people are the resource here, not the food.

3) change the product. After people are protected, a farmer and the family can move to another crop. Sunflowers, carrots, beats, etc. And offer HUGE profit margins for this produce.

Corn is now worth more than gold, if the Taleban will not invest in corn and bio-fuel, then the west should offer as many farmers of poppies as they can find to grow and produce bio-fuels. The capacity to create this product is already fixed into their DNA.

Farms--> Harvest--> Processing--> chemical alteration--> packaging--> transportation.

Yes Mr. Rubin, a very intellectual (and plausible) idea indeed!

The Stark Raving Viking said...

I would blame most of the world's drug addictions on the American government.

Under President Carter the CIA started exporting drugs out of Afghanistan and cocaine began being flown out of S. America in a big way by CIA and military transport when Reagan needed to pay for covert operations and assassinations.

The Stark Raving Viking blog

Steven G. Erickson

Anonymous said...

true but we should take care:

Unknown said...

Mr. Rubin,

Many of us hate the terms Strategy and Capacity Buildgin as both proved to be useless.

The idea of using existing capacities to bring about tangible change is brilliant.

Any new Idea being explored should be evaluated both from Sharia Law and cultural perspectives. For instance, the credit system with interest is not allowed and without interest may not work.


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