AFGHANISTAN: THE ECONOMY UNDER MARXISM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP81B00401R000600080005-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 19, 2016
• Document Release Date: November 6, 2006
• Sequence Number: 5
• Publication Date: February 1, 1980
• Content Type: REPORT

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National
Foreign
Assessment
Center
Secret
Afghanistan:
The Economy Under Marxism
Secret
ER 80-101.20
February 1980
Copy 2 2 0
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National Secret
Foreign
Assessment
Center
Afghanistan:
The Economy Under Marxism (u)
Research for this report was completed
on 31 January 1980.
Division, OER, on
The author of this paper i outh-
ern Asia Branch, Developing Nations Division, Office
of Economic Research. Comments and queries are
welcome and may be directed to the Chief of the
Southern Asia Branch, Developing Nations
This paper was coordinated with the Offices of
Political Analysis and Geographic and
Cartographic Research. (u)
Secret
ER 80-10120
February 1980
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Secret
Afghanistan:
The Economy Under Marxism (u)
Summary Even before the December 1979 Soviet invasion, Afghanistan's economy
was faltering and its minimal economic gains had ground to a halt. Land and
credit reforms initiated by the pro-Soviet Marxist government that took
power in April 1978 caused major disruptions in economic activity and 25X1
helped spark the insurgency that has now spread throughout the country.
Kabul's land reform program, coupled with unfavorable weather in 1979,
resulted in a drop of 400,000-500,000 metric tons in wheat production.
Government attempts to tighten control over commerce produced frequent 25X1
shortages of essential goods and led to capital flight by bazaar merchants,
who are a major factor in overall trade and economic activity.II
Since the Soviet invasion, economic activity has slumped further. The
insurgents are hampering food and fuel deliveries to Kabul. In the capital,
the Soviet-backed Babrak government has imposed price controls on items 25X1
such as meat and tea and established special distribution centers for
essential commodities.
Longstanding Afghan-Soviet trade and economic aid ties are likely to be
strengthened in the wake of the Soviet invasion. Soviet economic support is
critical for Kabul now that Western aid donors have suspended their small
but important programs and multilateral financial institutions have halted
disbursements pending a reviewing of their operations. Even with Soviet
help, the durability of the Babrak regime is in doubt because it has failed to
rally popular support and it is viewed by nearly all Afghanis as atheistic and
anti-Islam.
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Boundary representation is
not necessarily authoritative
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Afghanistan:
The Economy Under Marxism (u)
The Current Picture
The Babrak regime shows few signs of actually
functioning as the government. The operation of key
ministries and government departments is in the hands
of Soviet adviser
Economic activity in the small modern sector of
Afghanistan's economy has slowed sharply since the
Soviet invasion. In major cities such as Herat,
Jalalabad, and Qandahar, unrest is widespread and
anti-Soviet demonstrations have occurred. Travelers to
Herat and Jalalabad report that those cities are tense;
business activity in Herat in early February was almost
at a standstill following several days of antigovernment
demonstrations. In Kabul, civil servants' resentment
against the Soviet invasion is taking the form of work
slowdowns in ministries and government offices.I
Insurgents, in addition to harassing troop convoys, are
interfering with the flow of food and fuel from the
countryside to the cities, and Kabul is experiencing the
effects of these supply disruptions. Since mid-January
meat and wheat have been scarce in the city's bazaars
and prices are increasing rapidly. The capital is also
suffering shortages of firewood, charcoal, and kero-
sene-crucial household heating and cooking fuels.
The new government recently acknowledged that the
shortages are serious and placed price controls on
essential commodities including meat, tea, and vegeta-
ble oil. The government also ordered special distribu-
tion centers established in Kabul, at which essential
commodities will be sold at subsidized prices. Soviet
troops in and around Kabul may be contributing to the
pressure on food supplies by buying food at local
markets to supplement their rations.^
International disapproval of the Soviet invasion is
taking concrete form through a halting of economic
aid:
? West Germany, which had been financing communi-
cations, electric power, and irrigation projects, has
suspended aid disbursements indefinitely and re-
called its aid technicians.
? Japan has blocked $2 million of project assistance
committed last year.
? The European Community has cut off food assist-
ance that would have totaled 3,300 metric tons ' of
cereals and milk powder in the Afghan fiscal year
ending 20 March 1980.
? Kuwait's financing of a sugar mill under construc-
tion near Kabul has halted.
? India has told US Embassy officials that over the
next few months it will phase out the few remaining
technicians working on aid projects by attrition and
early termination of tours of duty. (At one point in
1979 nearly 100 Indian aid experts were working in
Afghanistan.
25
25
The World Bank has notified Kabul that it is halting
$115 million in loan disbursements until a review of
bank-financed projects is completed. The Asian Devel-
opment Bank has also stopped loan disbursements
pending a review of operations. Work on most
Western-sponsored aid projects had already slowed or
stopped altogether when the December coup that
toppled Amin occurred. Aid donors and multilateral
institutions had gradually withdrawn their people 25X1
because of the deterioration of the security situation in
the countryside late last year.
' Tonnages are given in metric tons throughout this assessment. (u)
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Babrak's Inheritance
Even if the Babrak government were now in a position
to address Afghanistan's underlying economic prob-
lems, it would face a herculean task. Afghanistan is
one of the poorest developing countries in the world.
Despite steps toward modernization of the economy
since the mid-1950s, Afghanistan's economy remains
primitive. Roughly 90 percent of the country's
15 million people are illiterate, and per capita income
is about $200 annually-approximately on a par with
Burma, Zaire, and Pakistan. (u)
After more than two decades of economic development
efforts, Afghanistan exists as two distinct societies.
The traditional society consists of 90 percent of the
population that resides in rural areas, which is
dominated by local tribal and Islamic religious leaders.
The modern sector of the economy embraces the
10 percent of the population that lives in urban areas.
This sector is dominated by Kabul, Afghanistan's
largest urban center with a population of about
700,000 people. Kabul's disparity with the rest of the
country is striking: it has 80 percent of the nation's
automobiles, 80 percent of its doctors, and 60 percent
of national electricity generating capacity. (u)
Economic progress since the mid-1950s has been slow
and uneven, partly because, until the 1978 Marxist
coup, successive governments moved cautiously in
implementing economic change to avoid upsetting
traditional customs and patterns of livelihood. As a
result, 80 to 90 percent of the people remain dependent
on agriculture for their living, much of it subsistence
farming. The industrial sector is small and poorly
developed and consists largely of firms processing
agricultural raw materials and manufacturing light
consumer goods. Heavy industry is limited to a handful
of government-owned firms producing cement, fertil-
izer, and simple engineering products. The transporta-
tion system still consists solely of a road network
that is barely adequate for the modest requirements of
the economy; there is no railroad.E
Like most developing countries, Afghanistan has been
unable to mobilize domestic financial resources for
investment. At less than 7 percent, the tax/GNP ratio
is nearly the lowest in the world, while the share of
Afghanistan's tax revenues that comes from foreign
trade-more than two-thirds-is inordinately large.
The banking system is also poorly developed, with
commercial banking primarily confined to Kabul.
Although bank branches exist in the provinces, they
frequently serve as little more than a safe place for
holding funds. (u)
Existing alongside the rudimentary banking system
are the bazaar money traders, which are concentrated
in Kabul. The traders may account for as much as two-
thirds of annual turnover in foreign exchange. They
also make consumer loans and advance working capital
and housing and construction loans. Some experts
from international financial institutions who have
examined the Afghan economy believe the bazaar
money market may be more important as a source of
financing than formal institutions. Because Afghani-
stan has been unable to finance its own development
needs, it has had to rely on foreign assistance. The
USSR has been by far the leading single contributor,
providing slightly more than one-half of total foreign 25X1
aid since the mid- 1950s.E-1
Developments in 1978-79
Economic gains since the pro-Soviet Marxist coup in
April 1978 have been few, if any. The economic
difficulties and the insurgency that the Babrak govern-
ment now faces have their origins in tribal and peasant
reaction to economic and social reforms pressed under
the Taraki and Amin regimes. A credit reform law
(Decree Number 6) announced in July 1978 and a land
redistribution program (Decree Number 8) initiated in
January 1979 have been the particular focus of
discontent and open opposition (u)
Decree Number 6 provided for the cancellation or only
partial repayment of debts. Debts owed by share-
croppers and farm laborers were canceled in their
entirety, while debts owed by small farmers (defined
by Kabul as owning less than two hectares of land)
were repayable according to a sliding scale. Debt
incurred before 1975 was canceled in its entirety, debt
incurred in 1976 was reduced by 20 percent, by 40
percent if incurred in 1977, and so on. (u)
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Agriculture. As a complement to the debt law, Kabul
promulgated a land redistribution program that pro-
vided for transferring land free of cost to landless
farmers according to the quality of land. Farmers
could receive one hectare of top quality land, such as
acreage that is irrigated, and as much as five hectares
of arid land. The program also limited farm size to six
hectares for large landholders and called for the
formation of 1,500 agricultural cooperatives by the end
of 1979.2 Farm extension services were expanded to
include 100 teams operating on a village-to-village
basis to aid in implementing land reform. Kabul also
outlined its aim of redistributing water rights on
irrigated land, which accounts for two-thirds of
cropped land. (u)
By mid-1979 Kabul reported that 500,000 to 600,000
hectares out of 730,000 hectares appropriated by the
government for redistribution had been turned over to
296,000 landless peasant families. More than 50,000
hectares were also set aside for the formation of state
farms. Kabul announced the completion of land reform
in mid-1979 after Moscow advised the Taraki govern-
ment to end the program in order to calm opposition
from farmers.
Kabul's program wrought havoc in the agricultural
sector, especially among farmers growing wheat, the
leading food staple. At the beginning of the 1978/79
crop year (November 1978-October 1979) recipients
of land who had traditionally relied on credit from
large landholders and money lenders found it difficult
to get loans. As a result, farmers were unable to
purchase essential supplies such as fertilizer, seed, and
equipment. Large landholders, anticipating the loss of
most of their land, planted only the acreage they
expected to keep, further reducing the 2.3 million
hectares usually planted in wheat. The government's
newly established agricultural credit fund was of little
help. Funding was sufficient to meet only a small part
of the total requirement for agricultural credit.
To make matters worse, Afghanistan experienced
unfavorable winter weather that hurt the 1979 wheat
crop. An unusually mild winter cut water availability
z Approximately 250 agricultural cooperatives were already in
existence when the April 1978 coup occurred.
from melted snow for. irrigation. The combination of
the weather and the reduction in planted acreage
lowered wheat production by 20 percent from the 2.3
million tons it has averaged in recent years. Import
requirements jumped to 600,000 tons in 1979 com-
pared with an annual average of 200,000-300,000 tons
in the late 1970s.0 25X1
Kabul arranged for imports from both the USSR and
Western suppliers to cover the bulk of the shortfall.
The USSR agreed to supply 265,000 tons, Australia
100,000 tons, and India and Turkey 50,000 tons each.
Data on actual deliveries of wheat imports in 1979 are
only partially available. Through the end of September
1979, Afghanistan had taken delivery of approxi-
mately 300,000 tons of wheat, including 46,000 tons
from the United States under the Food for Peace
program.
Wheat imports, other than those from the USSR,
move through the port of Karachi, Pakistan, and then
by rail to the Pakistani-Afghan border. Congestion
and slow unloading of cargoes. have been longstanding
problems at Karachi, and cargo delivered for trans-
shipment to Afghanistan is usually given low priority
by Pakistani authorities. Despite strained relations 25X1
between the two countries, Kabul received assurances
from Islamabad last year that Pakistan would move
Afghan-destined wheat thro e port as exne
tiousl as possible. However 25
25
amt tar wt 25
con tttons at Karachi, reported that wheat offloading
operations were moving slowly. Wheat was piling up at
dockside under poor storage conditions; in some
instances the wheat was completely exposed to the
elements and showed signs of rotting. 25X1
Afghanistan could face another large wheat shortfall
this year. Acreage planted in late 1979 may have fallen
15 to 25 percent below normal levels as farmers left 25X1
their villages to join the insurgents or fled Afghanistan
with their families as the tempo of fighting increased.'
' The refugee exodus has accelerated since the Soviet invasion.
Pakistan estimates that the number of refugees at the end of January
1980 was approximately 500,000. An unknown but smaller number
of Afghan refugees are in Iran.
estimate there are refugees in the Iranian Province of 25
Khorasan. All told, approximately 3-4 percent of Afghanistan's
population may have fled as refugees since the April 1978 coup
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Even if good growing conditions prevail through mid-
1980, when harvesting of the winter wheat crop is
completed, the production decline could range between
600,000 and 800,000 tons. Should this volume of
wheat imports become necessary, however, Kabul is in
a good position to pay for foreign purchases. Foreign
exchange reserves were a near-record $420 million
when the Babrak government took power. At current
prices for wheat in international markets, imports
would cost Kabul $120 million to $150 million in
foreign exchange outlays for shipments delivered to
Karachi.^
Trade Nationalization. Government actions to bring
trade and commercial activities under tighter con
trols led to further disruptions in the economy during
1978-79. Soon after the April coup, Kabul required
that all imports by the private sector be handled
through the government. Until then only imports of
essential goods such as sugar, petroleum products, and
trucks, were monopolized by the government, and
businessmen were free to deal directly with foreign
firms for all of their other needs. Kabul also moved to
limit profit margins for wholesalers and retail mer-
chants. After deductions of certain expenses, whole-
salers were allowed a net profit of 8 percent and
retailers, 5 percent. (u)
Kabul's actions led to a sharp drop in government
revenues from import duties as businessmen cut back
purchases through organized channels and brought in
their goods through unregulated bazaar traders. In the
three-month period July-September 1978, customs
receipts fell by nearly 90 percent to about $3 million,
while shortages of essential commodities, such as rice
and vegetable oil, developed in various parts of the
country. Kabul's efforts to crack down on the bazaar
traders proved fruitless. From the very first, the
Marxist government considered the bazaar as a logical
initial target in asserting its control over the economy.
Kabul could not for long tolerate an unregulated,
freewheeling commercial sector in the midst of its
attempts to socialize the economy. Nonetheless, last
year the government abandoned a six-month effort to
tighten control over bazaar activities after persistent
rumors that bazaar merchants were sending large
amounts of money out of the country.n
Several businesses still in private hands when the April
1978 coup occurred were singled out for nationaliza-
tion including hotels, handicraft enterprises, and small
food-processing firms. Although the country's largest
hotel, the Intercontinental in Kabul, was nationalized
immediately after the coup, Kabul still had not moved
against other hotels and these business activities when
Amin was overthrown. The Babrak government has
announced that it is backing away from further
nationalization, for the moment. In an effort to revive
the flagging economy and deal with current shortages,
Kabul intends to return import privileges of certain
goods to the private sector, including auto tires, rayon
yarn, and dried milk.
Soviet Economic Ties
Despite two successive pro-Soviet governments in
Kabul, bilateral economic relations with the USSR
have not increased substantially. The level of Soviet
economic aid disbursements to Afghanistan in 1978-79
failed to rise much above the 1975-77 levels, which
averaged $50 million annually in project aid disburse-
ments and $10 million annually in commodity aid. A
flurry of bilateral economic aid and technical assist-
ance agreements signed after Taraki took power in
April 1978 largely represented implementing agree-
ments negotiated by the ousted Daoud government.
0
Economic aid was a contentious issue between the
Taraki-Amin regimes and Moscow. For its part, Kabul
had unrealistic expectations about the level of aid it
could expect from the Soviets. Kabul's proposed
economic development program for 1979-83 report-
edly carried a price tag of more than $4 billion, with
the Soviets expected to provide the lion's share of the
goods and services. The Soviets, as well as several
prospective Western aid donors, described the plan as
more of a wish list than a coherent plan for economic
development. The Soviets repeatedly rebuffed Kabul's
request for increased assistance, citing Afghanistan's
inability to absorb more aid because of insufficient
managerial and technical talent and poor infrastruc-
ture development, especially internal transportation
links. Moscow also reminded Kabul that it had
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$300 million in outstanding credits that were still
unallocated. Nonetheless Kabul attempted to loosen
Soviet purse strings by requesting membership in the
Council of Mutual Economic Assistance (CEMA) in
1978; this was also turned down. Moscow, however,
boosted the number of Soviet economic technicians
working in Af hanistan by nearly 1,000 in 1978-79, to
2,000 people.
The major development in Afghan-Soviet relations
during 1978-79 was Moscow's agreement to pay a
higher price for natural gas imported from Afghani-
stan. With exports of 35,000-40,000 b/d oil equivalent,
gas (via pipeline) is Afghanistan's major export to the
Soviet Union. Gas sales in recent years have accounted
for 20 percent, on the average, of total Afghan exports
and 40 percent of exports to the Soviet Union. The
Soviets agreed to a $0.14 increase to $0.59 per
thousand cubic feet soon after the April 1978 coup,
and agreed early last year to pay $1.08. Afghan trade
data for January-September 1979, however, suggest
that the $1.08 per thouand cubic feet price was not in
effect. Even at this price, gas prices would still have
been well below the average price of Soviet gas
delivered to Western Europe in 1979.
Gas exports will play an even larger role in bilateral
trade in the next few years given the onset of
production in February 1980 from a new field at
Jarquduq in northern Afghanistan, about 80 kilo-
meters from the Soviet border. Production from this
field, which was discovered in the early 1970s and
developed with Soviet technical assistance, is expected
to reach 35,000 b/d oil equivalent upon completion of a
new pipeline and gas processing facility, and the
drilling of additional wells. Gas from Jarquduq, and an
older nearby field, provides a small supplement to fuel
supplies in the Tadzhik Republic, USSR.
Afghanistan's economic relations with the Soviet
Union are entering a new stage in the aftermath of the
Soviet invasion, which will result in much closer ties.
For Kabul and Moscow the closer ties will pose a
dilemma. Should Western aid donors fail to resume
their programs, or resume them at reduced levels,
Afghanistan will expect the Soviets to fill the gap. If
this occurs, both Kabul and Moscow would be hard
pressed to project an international image of Afghani-
stan as anything more than a Soviet client state firmly
wedged in the Soviet bloc.. 25X1
The Continuing Political Drama
At present, the staying power of the Babrak govern-
ment is in doubt. The Soviets apparently are disap-
pointed with Babrak's inability to rally broader popu-
lar support. Rumors were rife in Kabul at the end of
January that Babrak would probably soon be replaced.
At the head of the list of possible candidates are
Deputy Prime Minister Sarwari, who was head of the
security services under Taraki, and Major General
Qader, a former Defense Minister imprisoned in mid-
1978 and now a member of the Revolutionary Council.
Qader reportedly left for Moscow in mid-January on
an unpublicized four-day visit. Also mentioned is
Commerce Minister Jalalar, a non-Marxist who -eryed
in the Cabinet of former President Daoud. 5
The Babrak regime has moved unsuccessfully on
several fronts to garner domestic support and to
counter the pervasive perception that it is a Soviet
puppet government. In particular, it is acting to project
an image of respect for Islam. In a widely publicized
move, Kabul has announced that it will replace the
country's red flag introduced by Taraki with a new flag
that will include the color of Islam, green. However,
Babrak's claim that his is the first government in 50
years to allow religious freedom in unlikely to impress
a population that equates Marxism and the USSR
25
with atheism and views many of the reforms the 25X1
government advocates as antireligiousf_~
The new government appears intent on pressing the 25X1
economic and social reforms initiated under Taraki
and Amin. Kabul shows no inclination to back away
from land reform despite the resentment and chaos the
program has caused. Agriculture Minister Mohmand
recently stated that the government will enlarge the
public sector's role in agriculture. He indicated that
existing agricultural programs would continue, with
concentration on promoting the growth of cooperatives
and, ultimately,'state farms. 25X1