A thousand thumbs in the dike: microlending and a new role for international finance in Afghanistan.

• Author: Woda, Joshua D.

1. INTRODUCTION

   The villages of the Jurm valley sit in the mountains of the remote Afghan province of Badakhshan. (1) Though never conquered by the Taliban in its rise to power, like most of Afghanistan the valley's infrastructure, economy, and even the social bonds of its communities have been devastated by three decades of conflict. (2) Prior to 2003, the villages were dependent on poppy farming, had no electricity or clean water, and suffered from a shocking maternal mortality rate. (3) Seven years later, the relative prosperity of the valley now stands in stark contrast to the prevailing depravation of Afghanistan and provides an example of how international donors can foster development, raise literacy, and improve security through the use of small, direct loans. (4) By bypassing the corrupt central government, grants have been used to build and staff the valley's first women's high school, increase literacy, train midwives, and build irrigation systems for wheat farming. (5) Says one Jurm farmer: "the jihad was useless ... now we've put down our weapons and started building." (6)

   This Note argues that the International Financial Institutions (IFIs), the World Bank and International Monetary Fund (IMF), must play a central role in developing poverty alleviation programs and bringing Afghan governance into line with international norms. (7) Part II describes the role of microcredit and the IFIs in the reconstruction of Afghanistan. (8) In Part III, this Note discusses the applicable international and Afghan law that governs the conduct of the IFIs in Afghanistan. (9) Part IV provides an analysis of why the IFIs must play a principal role in the implementation of a comprehensive development plan, anchored by microfinance initiatives, which recognizes that promoting social justice is essential to Afghanistan's long-term stability. (10)

2. HISTORY: AFGHANISTAN, THE FALL OF THE TALIBAN AND THE REINTRODUCTION OF INTERNATIONAL CAPITAL

   After a prolonged period of disregard by the international community, the economic and humanitarian plight of Afghanistan reemerged in the world's consciousness as U.S. airstrikes precipitated the disintegration of the Taliban government in October 2001. (11) Despite massive investment in the Afghanistan project, neither the United States nor the IFIs have succeeded in building a viable Afghan state. (12) U.S. President Barack Obama has reaffirmed his administration's dedication to seeing the Afghan project to fruition by authorizing a temporary surge of forces. (13) While the influx of troops and civilians has for a time captured the world's attention, the pivotal question is whether this strategy will be reinforced by the prolonged international commitment to Afghanistan that is essential to its success. (14)

   1. The IFIs in Afghanistan, 2001-Present

      1. The Function of the IFIs

         As Nazi-Germany began its inexorable collapse, the IMF and World Bank were established to assist in the reconstruction of a devastated Europe and to ward off a recurrence of the financial crisis that triggered the catastrophic conflict. (15) The fundamental goals of the IFIs, as envisioned at their founding, were to raise standards of living and facilitate the balanced and fair growth of international trade. (16) The IFIs later acceded to a number of other roles, one of the most important being to lead international efforts to reconstruct post-conflict regions. (17)

         The IMF's most critical function is to provide emergency financing to states in danger of defaulting on sovereign debt. (18) The IMF is not an aid agency, and consequently restricts its dealings to the central banks of recognized national governments. (19) Rich nations deliver hard currency to the IMF which then provides loans, not grants, to nations in danger of default. (20) In post-conflict states, the IMF has provided emergency assistance to restore the fiscal viability of governments and thereby avert humanitarian disasters. (21)

         The World Bank--compromised of the International Bank for Reconstruction and Development (IRBD) and International Development Association (IDA)--provides loans to developing nations. (22) The World Bank requires member states to pay quota subscriptions to a central fund. (23) Unlike the IMF which relies on these subscriptions as its primary source of funding, the World Bank uses these payments as a base asset to leverage funds on the international capital markets. (24)

         The IFIs substantially influence the domestic policies of their borrowers through the use of conditionality. (25) In post-conflict nations in particular, the IFIs possess a dominant negotiating position and are able to attach strong conditions to assistance programs. (26) As the United Nations (UN) has taken a greater role in influencing human rights policy globally, the IFIs have made corresponding efforts to coerce changes in the humanitarian policies of their borrowers. (27) Because the IFIs are not parties to international human rights agreements, they are not under any direct legal obligation to ensure that their borrowers do not commit human rights violations. (28) However, given the increased attention paid to the social and political effects of monetary policy adjustments, the IFIs are faced with political and public pressure to consider the impact their loan conditionalities may have on the domestic human rights policies of borrowers. (29) In addition, as specialized agencies of the UN, the IFIs have an implicit responsibility to uphold the provisions of the UN Charter. (30) Similarly, the IFIs could potentially have an important role to play in efforts to combat international terrorism. (31)

      2. The Government, Policies, and Weakness of the Islamic Republic

         The current government of Afghanistan emerged from the Bonn Agreement, reached by prominent Afghans meeting under UN-auspices in late 2001. (32) The Bonn Agreement paved the way for the adoption of a national constitution and the election of Hamid Karzai as the first President of the Islamic Republic in 2004. (33) The Karzai government has been unable to solidify its control outside of Kabul and sustains itself only through international aid. (34) The government's weakness is further compounded by its reliance on ethnic, factional, and family politics. (35)

         Despite concerted efforts on the part of donor nations and NGOs, Afghanistan continues to be mired in poverty. (36) This situation is exacerbated by the failure of Afghan and International Security Assistance Force (ISAF) troops to provide security, particularly in the remote provinces outside Kabul. (37) The absence of security and economic opportunity has created a vacuum enabling the reemergence of the Taliban and related antigovernment militias. (38) Opium production remains both an important means of survival for hundreds of thousands of ordinary Afghan farmers as well as the primary source of income and influence for the Taliban. (39)

         Government efforts to crack down on poppy farming have made a negligible impact on the opium supply and have often proved counterproductive, driving Afghans closer to the Taliban. (40) Not only does opium production contribute to deteriorating security, it also fuels massive corruption in both the lower levels and highest echelons of the government. (41) Corruption is cited by ordinary Afghans and foreign officials as the principal reason for continued lack of confidence in the Kabul government's ability to control the country and lift its population out of destitution. (42) Further, the opiate trade distorts the local economy and could make building the sustainable and productive enterprises essential for the long term viability of the state impossible. (43)

         (3). Delivering Aid in Afghanistan

         Despite the significant efforts of foreign donors, serious and seemingly intractable obstacles prevent foreign investment from creating productive enterprises and providing aid to those Afghans in the greatest need. (44) A significant and well-documented barrier is the systemic corruption that siphons off funding into the pockets of politically connected Afghan oligarchs. (45) The scourge of corruption is compounded by the rampant violence preventing most aid workers from venturing out from the relative safety of Kabul. (46)

         The IFIs have been heavily engaged in poverty alleviation and economic reconstruction efforts in nations emerging from conflict such as Afghanistan. (47) In April 2008, the Afghan government approved the joint World Bank and IMF formulated Afghanistan National Development Strategy (ANDS). (48) The ANDS identifies its three pillars as: 1) Security; 2) Governance, Rule of Law, and Human Rights; and 3) Economic and Social Development. (49) These goals are to be achieved through fostering private sector driven development and promoting increased foreign investment in Afghanistan. (50) Irrespective of the palpable plight of the ordinary Afghan, the IFIs have generally approved of the macroeconomic policies instituted by the Kabul government. (51) The IFIs have, however, cited poor governance, weak regulatory framework for the financial system, deteriorating security, and the general absence of the rule of law as systemic risks threatening the macroeconomic stability of Afghanistan. (52) Despite these continuing issues, the IFIs were generally encouraged by Afghanistan's progress and consequently approved $1.6 billion in debt relief in January 2010. (53)

      4. Challenges of the Next Decade

         Afghanistan enters the 2010s in a position just as precarious as that of 2001. (54) Geopolitical forces outside its control, particularly the unwillingness of an intransigent Pakistan to dismantle the insurgent networks using its territory as a staging ground for cross-border attacks, compound its internal dysfunction. (55) Pakistan's desire to maintain strategic depth against its fierce rival India has provided the Taliban with continued access to safe-havens in Pakistan's Pashtun-dominated tribal...