WTO Accession of Afghanistan: Costs, Benefits and Development Challenges

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1 WTO Accession of Afghanistan: Costs, Benefits and Development Challenges By: Ahmad Shah Mobariz, Faculty of Economics, Gharjistan Institute of Higher Education & Consultant, Supreme Audit of Afghanistan

2 Introduction to Afghanistan s Economy A land-locked least developed country 78% of the population lives in rural areas and 75% of the population engaged in agriculture 42% of the population below national poverty line Most of development projects are managed through development budget funded by donors and domestic revenue sources barely suffice operational expenditure, except defense

3 Source: World Bank (2013) Introduction to Afghan Economy (Cont d) Indicator Population GDP GDP Per Capita Table 2-1 Structure of Afghanistan Economy for the year 2012 Value/Percentage Million 20.5 billion 687 USD GDP growth 14.40% Inflation 7.20% Imports of goods and services as percentage of GDP 39.20% Exports as percentage of GDP 5.50% Current Account Gap 7.5 billion USD Services as percentage of GDP 53.5 Trade in Services 25.90% Agriculture Value added as percentage of GDP 24.60% Industry as a percentage of GDP (2011) 22.50%

4 Percantage Share Trade Profile of Afghanistan Figure 2.1. Export desitnations of Afghanistan for the year Pakistan India Iran China Saudi Arabia Others

5 Percentage Share Trade Profile of Afghanistan Figure 2.2. Major Suppliers to Afghanistan Supplier Country Data Sources: WTO, CSO

6 Million Dollars Trade Profile of Afghanistan Figure 2.3. Exports and Imports of Afghanistan Exports Imports Data Source: CSO (2012) Year

7 Trade Profile of Afghanistan Figure 2.4. Exports to Imports Ratio Exports to Imports Ratio Data Source: WTO

8 Trade Profile of Afghanistan Figure 2.5. Export Growth Rate Export Growth rate (2002 being the base year) Data Source: CSO & MOCI (2012)

9 Trade Policies Current trade and tariff policies of Afghanistan are as following: Ad valorem tariffs (presently applied); Specific duties, calculated charged as fixed amount per quantity; A combination of ad valorem tariffs and specific tariff rates; Preferential tariff rates (only for some goods imported from India in line with Indo-Afghan Preferential Trade Agreement (PTA))

10 Tariff Structure Table 2.2. Tariff Structure of Afghanistan for the year 2012 Serial No Tariff Band No of Tariff Lines Share in Total % % % % % % % % % % % % %

11 percentage share Afghanistan s tariff in comparison to other LDCs Figure 2.8. Comparison of Simple Average MFN Rate between five LDCs Year Total Commodities Agriclutural Products Non-Agriculutral Poducts Afghanistan Nepal Congo Burkina Faso Uganda Data Source: WTO (2013)

12 WTO Accession of Afghanistan Afghanistan National Development Strategy (ANDS) considers growth through trade as one of the alternative for aid dependence and sustainable development, hence Afghanistan applied for WTO membership for the following objectives: Secure stable and non-discriminatory access for Afghan exports Control over unfair treatment of Afghanistan s goods and services in foreign markets Secure non-discriminatory transit for Afghanistan s exports Modernization of the economy Enhance economic growth and development Increase fiscal revenue Good governance, enhancement of the rule of law and transparency in the system

13 WTO Accession Process Table 2.3. WTO Accession Process of Afghanistan 1. Application Received 21 November Working Party Established 13 December Memorandum of Foreign Trade 31 March 2009 Regime (MFTR)submitted 4. Replies to the questions raised 26 July Meetings of the Working Party 31 January June December July 2013

14 WTO Accession Process (Cont d) 6. Other Documentation (a) Additional Questions & Replies 19 November October April July 2013 (b) Information on agriculture (WT/ACC/4) 29 October 2012 (c) Information on services (WT/ACC/5) (d) SPS/TBT checklists (WT/ACC/8) 6 February 2012 (SPS) 26 April 2012 (TBT) 7 June 2012 (SPS) (e) TRIPS checklist (WT/ACC/9) 28 October November 2012 (f) Legislative Action Plan 28 October June 2012

15 Cost-Benefit Analysis Theory: Tariff Cuts improves consumer welfare, reduces government revenue, may reduce producers surplus in a small economy and improve general welfare of the economy WTO stipulates that WTO-based trading system promotes rule based trading through dispute settlement mechanism under WTO, enhances efficiency, improves good governance, reduces cost of living and speeds up economic growth.

16 Empirical Cost-Benefit Analysis on Afghanistan The underlying theory: Partial Equilibrium The Tool: WITS/SMART Stimulation The Data: World Bank, UNCTAD, WTO Similar studies: Kym Anderson (1998) ADB study on implication of SAFTA: Quantification of Befits from Economic Cooperation in South Asia (2008) Lawrence Otheino and Isaac Shaniyekwa (2011), study on Uganda

17 Theoretical Base for WITS

18 Results of the Model

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21 Result of the Model: Consistent with the Theory Figure 4.2 Partial Equilibrium Result of top 25 Tariff Schedules (Value in million USD) at 10 percent tariff cut at 5 percent tariff cut Revenue Effect Consumer Surplus Effect Welfare Effect Trade Creation Effect

22 Result of the Model (Cont d) Table 4.5. Comparative costs and benefits of tariff cut (value in million USD) Effect of tariff cut At 10% tariff cut At 5% tariff cut Revenue Effect Consumer Surplus Effect Welfare Effect Trade Creation Effect

23 Post Accession Challenges: 1-Development Challenges Sustainable Development requires transitional industrialization which in turn implies that domestic producers need to be supported against foreign competitors Our model does not say anything about the producers. In a small country like Afghanistan where producers are less competitive may lose out Agriculture is the major sector of the economy which needs special attention Textile industry has existed in the country for long which needs to be supported and encouraged

24 Case of Wheat Production Figure 5.1 Production cost and market price of wheat in Northeast Region (value in USD/Tone) Estimated production cost per ton Market price per tone Source: Malleta (2004) & FAO (2013) Note: Both sources have used primary survey for their estimation

25 2-Institutional, Legal & Environmental Challenges Complex interagency relations in Afghanistan Human Resources Capacity Building Business Capacity 22 Laws yet to be passed Resource exploitation and lack of government capacity Environmental degradation

26 Conclusion The results of this study is consistent with the theory and similar studies Sustainable development requires support of domestic producers and agriculture sector With the flexibilities available with the WTO Afghanistan can maintain maximum policy space for the support of its domestic producers Challenges still remain after accession. The economy needs to be modernized and efficient legal and institutional mechanism should be set up to align with WTO-based trading system and benefit from the new opportunities For all these Afghanistan needs special technical assistance and Aid for Trade can be one of the ways to ensure this.

27 Recommendation to Policy Makers Individual and sector-wise policies need to be integrated: Private Sector Development Strategy Export Promotion Policy Industrial Policy Challenging trade related development projects through the government budget and under the leadership of MoCI Aid for trade should be on the top agenda

28 Thank You