Special Inspector General for Afghanistan Reconstruction

Lessons Learned Report

April 2018

Private Sector Development and Economic Growth:
Lessons from the U.S. Experience in Afghanistan


Cover photo: Traffic in Kote Sangi, on the western edge of Kabul City. (UNAMA photo by Fardin Waezi)

This report – the third in a series of lessons learned reports by SIGAR – examines the U.S. government’s support to private sector development in Afghanistan since 2001, through efforts led by the U.S. Agency for International Development and additional significant roles played by the Departments of State, Defense, Commerce, and Treasury.

SIGAR’s analysis highlights the difficulty of supporting economic development in a war-shattered country. Afghanistan’s early economic gains were largely due to foreign spending and were not sustainable. Optimistic predictions of future progress did not reflect the reality of Afghanistan’s economic and security environment, the capacity of institutions, its relations with its neighbors, or the impact of corruption. The U.S. government and other stakeholders failed to understand the relationships between corrupt strongmen and powerholders, and the speed at which Afghanistan could transition to a Western-style market economy.

Many of these warlords became multimillionaires overnight. They had access and control. Powerful people controlled access to markets, including inputs and labor markets.

A former U.S. government official

The report identifies lessons to inform U.S. policies and actions at the outset of and through a reconstruction and provides recommendations for improving private sector development efforts. These lessons and recommendations are relevant for ongoing work in Afghanistan – where the U.S. government remains engaged in building and supporting the Afghan economy – and in future endeavors to rebuild other weak states emerging from protracted conflict.

The U.S. government did not engage, anywhere in any of its various departments and agencies, in extensive planning for a post-Taliban Afghanistan. There was no time, and not much incentive, to do so…The assumption was that the international community would pick up the pieces after the Taliban regime was displaced.

Dov Zakheim, former DOD Comptroller

U.S. Support to Private Sector Development

2001 - 2017: U.S. Support to Private Sector Development

Timeline of U.S. Support to Private Sector Development from 2001 to 2017.

2001 - 2005: Afghanistan is “Open for Business”

With less than one month between 9/11 and the start of Operation Enduring Freedom on October 7, 2001, there was no time for systematic planning in Afghanistan.

U.S. agencies and officials attempted to push the Afghan economy toward privatization, a move thought to generate quick revenue and supported by the Afghan government. Most Afghans, however, were unenthusiastic about privatization because they looked to the state to be the lead economic actor. On the ground, U.S. agencies sought to promote domestic and foreign investment in Afghanistan and organized conferences for potential U.S. investors.

Despite these early efforts, there was concern among Afghans that the United States had a limited commitment to nation building and would not devote sufficient financial and political resources to reconstruction, including private sector development over the long term. This concern was reinforced by the shifting of the U.S. administration’s gaze to the looming invasion of Iraq.

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2006 - 2008: Ratcheting Up Assistance

With alarming levels of insecurity, insurgent activity, and opium production, significantly more resources from the U.S. began to flow into Afghanistan in an attempt to stabilize the country. These resources escalated U.S. efforts to improve the enabling environment, including by prioritizing infrastructure; supporting land and property rights reforms; and financing economic opportunities.

In an effort to support small and medium businesses, U.S. agencies began a series of enterprise development initiatives aimed at expanding markets, developing a skilled workforce, increasing access to capital, creating jobs, promoting investment, and developing domestic products. To increase access to finance, the U.S. established and expanded financial institutions that could lend to small and medium enterprises.

With the influx of resources came corruption, the perceived diversion of millions of dollars of reconstruction money, and an unequal distribution of wealth, which started to become of serious concern to Afghan citizens and the U.S. government.

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2009 - 2012: The Military and Civilian Surge

The surge of U.S. military and civilian personnel into Afghanistan was accompanied by massive increases in funding. Reconstruction spending increased by 58 percent from FY 2009 to 2010, despite widespread reports and analysis that suggested spending at the previous, lower levels was already problematic in terms of accountability and budget execution.

This was also the era of counterinsurgency, which provided an intellectual underpinning to development efforts in Afghanistan, leading the military to pay more attention to the economy and increase its direct involvement in private sector development.

As part of the whole-of-government approach, aid officials increasingly aligned their programming and geographical focus with the U.S. military’s stabilization and counterinsurgency priorities. The U.S. reinforced its support for regional integration, trade liberalization, and increased exports.

The simultaneous announcement of a 2009 surge and its planned 2011-2014 drawdown and transition period introduced a heavy cloud of uncertainty that hung over most of the three-year period.

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2013 - 2014: Drawdown and Transition

Through most of this period, economic activity declined due to a combination of reduced international spending and uncertainty about the political and security outlook. Informal observations of a plunge in property prices, leveling or declining wages, and increased capital flight indicated a lack of confidence in the economy and confirmed the sense of foreboding. Afghans showed their skepticism by reducing investment, curtailing spending, and moving their capital to safer havens outside the country.

The U.S. maintained an emphasis on “sustainability,” which was manifested, in part, by pressure on the Afghan government to increase taxes in order to replace foreign aid with another revenue stream. This pressure reinforced the uncertainty and pessimism about the drawdown that fostered a “last call” mentality.

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2015 - 2017: After the Transition

By early 2015, advocates for the private sector were becoming disenchanted by the lack of progress, perceived micromanagement of government programs, and paralysis of policy and personnel appointments produced by political maneuvering within the government. At the end of 2017, with insecurity increasing, the economic outlook in Afghanistan was discouraging.

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Five Main Private Sector Development Interventions

1. Creating an Enabling Environment

UNAMA photo by Fardin Waezi
UNAMA photo by Fardin Waezi

The first main private sector development task for the U.S. and its partners was to create an enabling environment in which a dynamic, licit private sector could thrive, building confidence in the stability of the economy and encouraging businesses to invest.

Customs and tax sector reforms were prioritized early on to generate revenue. Despite experiencing significant reform, poor governance, confusion, and a lack of transparency in the tax system plagued the formal business sector. Tax collection was further complicated by revisions to the tax laws in 2005, 2009, and 2015. These revisions confused businesses and often increased their tax burden, encouraging some to remain informal.

A new monetary policy regime presented a need for a new legal framework to regulate and govern. Because there was a sense of urgency in establishing a legal framework, foreign advisors often found it easier to adapt laws from other countries and draw from international experience, rather than going through the long legislative process. These laws reflected a wide range of legal ideas and concepts, and some conflicted with local precedent and tradition. Many laws were not accompanied by plans to build or modify the institutions needed to apply them, and Afghanistan’s weak judicial system left even the best-crafted laws vulnerable to manipulation.

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2. Providing Access to Finance

Asian Development Bank photo
Asian Development Bank photo

Early on, the U.S. recognized the importance of access to finance as a critical factor in promoting domestic and foreign investment. It also recognized that a private sector economy required different types of government financial institutions than existed before 1978.

The U.S. saw a lack of formal sources of finance at reasonable rates as a serious constraint to business development, and supported the emergence of private commercial banks and non-bank, sector-specific financial institutions to offer loans that were attractive to micro and small enterprises. The U.S. expectation that some of these newly created financial institutions would become self-sustaining within a limited project timeframe was unrealistic. These institutions continue to rely on external assistance, and face ownership, management, and operational sustainability challenges.

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3. Promoting Investment

World Bank photo by Abbas Farzami
World Bank photo by Abbas Farzami

The U.S. government saw fostering foreign and domestic investment as the cornerstone of both economic growth and private sector development, especially in a developing economy with limited state resources and a need for increased productivity.

The 2010 announcement of the 2014 NATO troop drawdown heightened the sense of uncertainty, exacerbated the reluctance to invest, and spurred an increase in capital flight. Efforts to encourage investment experienced some success. However, investment was limited for a variety of reasons, primarily uncertainty, insecurity, poor economic governance, and the lack of comparative advantage in potential industries.

Notwithstanding attempts to address constraints such as power, land tenure, and a lack of information about opportunities, Afghanistan was simply not an attractive place to invest.

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4. Promoting Regional and International Trade

Resolute Support photo
Resolute Support photo

The U.S. and its international partners viewed regional and international trade as an engine of growth that, coupled with the market economy and strengthening of high-value agriculture, could become part of a virtuous circle. While certain initiatives toward that end were successful, outcomes indicate that trade initiatives did not result in actual gains to productivity or an improvement in Afghanistan’s trade balance. The realities of war-shattered infrastructure, corruption and poor governance, and an inability to rapidly increase productivity while rapidly reducing trade barriers ultimately hindered success.

Afghanistan’s rapid integration into regional and global markets also had adverse effects on domestic producers as inexpensive imports flooded markets. Significant U.S. and international efforts to build the capacity and infrastructure of the Afghan government have been constrained by factors such as high staff turnover, insecurity, poor maintenance of facilities, and corruption. Afghanistan’s trade imbalance has continued to grow steadily since 2002, with imports tripling by 2015, while exports remained stagnant and low.

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5. Providing Direct Support to Enterprises

UNAMA photo by Fardin Waezi
UNAMA photo by Fardin Waezi

From the start of the reconstruction effort, the U.S. government focused on building an enabling environment that would support the creation or expansion of firms. From 2006, however, the United States began to place greater emphasis on direct support to individual enterprises.

This was based on the belief that local companies needed direct financial and technical assistance to expand in the formal economy, access external markets, and mitigate risk. Despite some successes, direct support to enterprise programs had shortcomings in design, implementation, and oversight. While some companies used financial support and technical assistance to expand their access to markets, other companies that received direct grants became dependent on these sources of “free money,” without which they could not sustain profitable operations.

Agencies overestimated their capacity to implement projects, especially within the aggressive timeframes often required. Internal obstacles, such as limited capacity and high staff turnover, along with external obstacles, such as bureaucracy, corruption, and poor infrastructure, delayed operations, affected quality, hurt timeliness, and increased the costs.

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There was no group saying, ‘Here’s our overall strategy, here’s what we need on the ground.’ No, people just showed up.

A former USAID senior official


Afghanistan’s early economic gains were largely due to an immediate post-conflict recovery and the large infusion of foreign spending, and therefore were not sustainable at those initial levels. At the same time, the U.S. government’s initial efforts to set up basic economic infrastructure, laws, and policies helped set the stage for the progress that did take place.

The U.S. government helped to build institutions that supported private sector growth, although it overestimated the speed at which Afghanistan could transition to a Western-style market economy with sustainable and accountable institutions that were not under the influence of corrupt strongmen. Rapid opening up to trade allowed Afghan consumers access to cheaper imported goods, but the opening of the country’s borders before Afghan goods were competitive with imports hurt domestic producers.

U.S. financial aid practices, at times, encouraged corruption, complicated the challenges of coordination within and between U.S. agencies, and kept non-viable Afghan enterprises afloat. Above all else, the private sector needed stability and certainty to develop, and the overall absence of these factors limited foreign and direct investment. It would have been very difficult for robust and sustainable economic growth to take root in an environment with such pervasive uncertainty.

A corrupt and inefficient government is a bigger problem or threat to the private sector than the Taliban.

International telecommunications executive


Hand in Hand International photo
Hand in Hand International photo


UNAMA photo by Zakarya Gulistani
UNAMA photo by Zakarya Gulistani


USAID photo
USAID photo

Executive Branch Recommendations

Legislative Branch Recommendation