$16 Billion for Afghanistan: Why Less Money Might Be a Good Thing

This is a joint post with Danny Cutherell.We returned last week from a brief trip to Afghanistan, where we met with people on all sides of Kabul’s enormous aid industry – representatives of several donor agencies, contractors, NGOs and current and former Afghan government officials – about the underlying strategy of the U.S. aid effort in Afghanistan, and how it must change during the upcoming transition.As we departed Afghanistan, President Karzai flew to Tokyo asking for at least $4 billion per year for the next four years, and he appears to have gotten it.  Is this good news?  Is $16 billion too much or too little?  And does the mutual accountability framework agreed to by the Afghan government and the international community mark a real turning point in the aid strategy for Afghanistan, or is this just more of the same?  Here are a few reasons that the results of the Tokyo conference are mostly good news.A strategic shiftFirst, the United States and the donor community are clearly narrowing the scope of their ambitions. In early 2009, U.S. goals for civilian assistance in Afghanistan could be broadly placed in three overlapping categories:

1. Stabilization and counterinsurgency (aka COIN)
2. Large, direct investments in growing the Afghan economy
3. Support to the Karzai government.

In 2012 COIN has lost some of its currency, and the value of development as a tool of stabilization has been called into question. The recent re-assertion in Tokyo to commit 50% of all resources on-budget and have 80% aligned with National Priority Programs (NPPs) demonstrates a waning of interest in the second category, which was dominated by big-ticket contractor-led development projects. What’s left is a doubling-down on direct support to (and through) the government.Filling the financing gapSecond, given this narrowed focus, $16 billion could theoretically fill Afghanistan’s “financing gap.” The graph below shows three main revenue flows for development spending in Afghanistan: 1) domestic revenue through taxes and tariffs, 2) “on budget” aid to the Afghan government, and 3) "off budget" aid spent directly by donors through contractors or NGOs.  (The enormous flows of security-related aid to maintain the Afghan National Army and Police are ignored here.)   The numbers up to 2011 are actual figures, and they show both steady growth in domestic revenue collection, but also the enormous influx of aid immediately following President Obama's 2009 civilian "surge".

Looking forward, the pledge of $16b over 4 years almost certainly means a dramatic drop in total resources available for development in the near future.  But if donors fulfill their pledges to align most of their support with the NPPs, and to spend half of it "on budget", the impact on Afghanistan's public finances -- and the reduction in essential programs that reach Afghans in rural districts -- may be limited.  For 2012 and beyond we estimated revenue levels as follows:  first, the Afghan Ministry of Finance projects continued growth in domestic revenue collection.   On top of this we simply added the commitments made in Tokyo -- taking donors at the word about shifting assistance onto the government's budget.The net result is actually a steady increase in resources available to the Afghan government.  The trade-off is a dramatic drop in external spending by donors on "off-budget" development projects.Rationalizing how and where aid is deliveredFinally, if off-budget aid tapers off as shown here, it may not be such bad news. The World Bank’s recent  transition report highlights just how little off-budget aid actually makes it to Afghans:  “A study by the Peace Dividend Trust (2008) suggests that the domestic content from trust funds and budget support is around 70–80 percent, and only 35–50 percent and 10–20 percent respectively for local and international contracts, resulting in an overall local impact from donor aid of 38 percent. In other words, only 38 cents of every aid dollar spent in Afghanistan actually reaches the economy through direct salary payments, household transfers, or purchase of local goods and services.”Off-budget aid is not just inefficient, it’s generally not spent in the right places, as the graph below demonstrates.

In the name of short-term stabilization objectives, USAID and Pentagon aid programs in Afghanistan allocate resources in ways that are at odds with development priorities.  The X-axis shows the poverty rate in each of Afghanistan's 34 provinces circa 2007/08; the Y-axis shows the total number of IED attacks on NATO and ANSF per capita in each province in 2010; and the size of the bubbles is proportional to U.S. aid spending in the province in 2010.  Three points stand out:

1. Violence is lowest in the poorest provinces. (The downward slope of the points in the graph illustrates the tension between security and development goals for aid programs in Afghanistan.)
2. Aid is also lowest in poorest provinces. (Small bubbles on bottom right - somewhat perverse from a development perspective.)
3. There are huge aid flows to unstable provinces where development impact is questionable. (Big bubbles on top left.)

In contrast, aid money channeled through the government — like the much-celebrated National Solidarity Program — is, in principle, much more equitably distributed across provinces and districts. The focus is on working in areas where the security and governance situation allows for the possibility of genuine development, rather than implicitly punishing peaceful districts or swamping insecure areas with unsustainable resource levels.Inasmuch as Tokyo means shifting money from the bloated Helmand bubble in the upper left, to the smaller bubbles in the lower right, it’s good news.Rhetoric, reality, proof, pudding, etc.While we are glad to see donors pledge to channel more of their funds through the NPPs, there are good reasons to be less than sanguine about the prospects of this happening smoothly.First, the news from Tokyo was surprisingly vague about where this $16 billion will come from.  According to the Wall Street Journal, Japanese officials did not release a breakdown by donor.   The best available estimates are that the United States will contribute between $1 and $2.3 billion per year over the next decade, followed by Japan which pledged $3 billion over four years, and Germany which pledged $536 annually until at least 2016.Second, Although Karzai has long maintained that 100% of aid dollars should be routed through Afghan Government sources, our recent conversations with individuals in Kabul who are currently involved in this process lead us to believe that even 50% on-budget support may be unrealistic. Concerns over corruption and a lack of local capacity are the most often-cited sticking points, but even in high-capacity ministries with excellent records these transfers take a long time and are fraught with missteps.Third, when asked to figure out how much funding was needed to fill the Afghanistan’s post-2014 financing gap, the World Bank and the Afghanistan Ministry of Finance came up with wildly divergent figures. The World Bank attempted to figure out how much money Afghanistan would need to “accelerate progress” to meet the millennium development goals by 2025, and came up with one number. Meanwhile, the MoF simply calculated the cost of funding the NPPs over a similar period, and came up with a significantly larger number ($16 billion in 2011 alone, tapering to $8.9 billion for 2015). The $16 billion request that came out in advance of Tokyo represented a compromise between the two. The size of this spread highlights the degree to which all of these figures should be taken with a grain of salt.To summarize by stating the obvious: $16 billion is a lot of money if spent well.  It is more than enough to meet the Afghan government’s fiscal needs if donors fulfill their Tokyo commitments to align spending with the government’s development priorities.  Doing so would signal a decisive shift in the underlying strategy of American-led aid effort in Afghanistan – scaling back USAID’s contractor-led model of off-budget infrastructure investment and stabilization programs in the most inhospitable areas of the country, and refocusing efforts to build and sustain a functional Afghan state.  If it happens, that strategic shift, more than the $16 billion headline, is reason for tentative optimism on the heels of the Tokyo conference.