Messrs. Sherkhan Farnood and Khalilullah Frozi — the top executives at Afghanistan’s largest banking institution, Kabul Bank — were fired from their jobs last week by the leaders of the nation’s central bank when a run on their bank threatened its continued existence.
Kabul Bank apparently has accumulated losses in excess of $300 billion. Which, of course, leaves it as solvent as Fannie Mae and Freddie Mac. Though we have no report that the Afghanistan central bank leader is named either Abuben Behrnanki or Hafizullah Pahlson, Kabul Bank is now in the “too big to fail” category.
If President Obama’s counter-insurgency strategy is to succeed, Afghanistan’s economy has to be put on sound footing. Part of a functioning economy is an adequate banking system that enables people and companies to function by depositing and then spending their earnings.
Which makes a better case that Kabul Bank is too big to fail than was used to justify saving Fannie, Freddie, and a host of other American financial institutions.
We saw the same problem in Iraq in 2003 and Afghanistan in 2001. For years after the 2003 invasion — and still today — Iraqi troops had to return to their homes to deliver the pay they received from us and the Iraqi government. There was no banking system that enabled them to function economically. In Afghanistan outside of Kabul — just like Iraq outside of Baghdad — there was no functioning banking system. So, in each nation, we expended enormous funds and years of work to create one.
Now, Kabul Bank is the central pay source for more than 250,000 Afghans including most of the Afghan military and government employees. If it closes, those troops and employees will abandon their jobs, and the government will fall.
At this point, the White House is claiming that we won’t bail out Kabul Bank. But stopgap measures, including the transfer of over $100 million from Afghanistan’s central bank to Kabul Bank, won’t sustain the bank for more than a few months. American aid is going to be necessary and will not become less so as the calendar’s pages flip over toward President Obama’s planned July 2011 commencement of America’s withdrawal of combat forces from the Southwest Asian nation.
No amount of American expert advice will change the Afghan banking system into one that can function because the economic obstacles are too great.
What could sustain the Afghan economy? It’s not necessary that there be a bank in every shopping center or ATMs dispensing money after hours. There are virtually no “shopping centers” outside of Kabul and the nascent commercial city of Mazar-e-Sharif. What is necessary is, first, security in which Afghans can create and conduct the kinds of businesses — farms, processing facilities for exported foods and other crops and manufacturing plants that can employ people and pay them to work.
To build such an economy, Afghans would have to overcome the safety issue, which is beyond their reach and ours. The average age of the Afghan population is 18, and the literacy rate is about 28%. Of the 28 million Afghans, about 50% speak Persian, another 35% speak Pashto, and 11% Turkic languages. Afghanistan’s GDP is only about $27 billion. It remains one of the poorest nations in the world, with one of the lowest standards of living.
According to the CIA “World Factbook,” Afghanistan’s economy is extraordinarily weak: “Despite the progress of the past few years, Afghanistan is extremely poor, landlocked, and highly dependent on foreign aid, agriculture, and trade with neighboring countries. Much of the population continues to suffer from shortages of housing, clean water, electricity, medical care, and jobs. Criminality, insecurity, weak governance, and the Afghan Government’s inability to extend rule of law to all parts of the country pose challenges to future economic growth.”
In his last report as Afghanistan commander, Gen. Stanley McChrystal wrote that his forces had the strength to operate in only 45 of 121 — 37% — of the important districts in Afghanistan and that the population supported the Afghan government in only 24% of the key regions of the country. That report, dated April 2010, was made before Gen. David Petraeus took over and the troop surge took place.
But even with the surge, there is no reason to believe that the situation has changed materially. Even if Gen. Petraeus and the surge had increased the population’s support of the Karzai government to 50%, it would not mean that we had created with it the safety, literacy, multi-language skills and other economic infrastructure that could make Afghanistan’s economy viable.
Afghanistan is so far from a free and viable economy, the only remaining question is whether we should pay to keep its banks afloat. President Obama, in his Oval Office speech declaring the end to combat operations in Iraq, recited the mantra that we would pace our withdrawal from Afghanistan based on the conditions on the ground. But — contradicting himself — he said that the withdrawal would begin in July of next year regardless of those conditions. He said, “But make no mistake: this transition will begin — because open-ended war serves neither our interests nor the Afghan people’s.”
By insisting on the July 2011 withdrawal date, Obama made the Kabul Bank a short-term investment. If we bail it out, we will do so with the knowledge that the investment will not be recovered.
If it took only money to keep Kabul Bank open and to prevent Afghanistan from returning to Taliban control, the money would be well spent. But the money won’t provide the safety and security that Afghans need to prosper.
We cannot build a functioning democracy in Afghanistan without creating a viable economy as its foundation. When we attacked Afghanistan there was none, and there is not one now. Even without the war in Afghanistan, it would take decades (if not centuries) and trillions of dollars to do so.
Prosperous economies can be revived after the worst devastation as post-World War II Europe and Japan demonstrate. But where — as in Afghanistan — no economic infrastructure exists, where the population remains disunited and so insecure that it cannot function economically, there is no economy to revive.
President Obama’s nation-building strategy — inherited from President Bush — will end with the beginning of our withdrawal from Afghanistan in 2011. Those who believe that we will leave behind a stable democracy strong enough to prevent that country from reverting quickly to a safe haven for terrorists should eagerly support bailing out Kabul Bank.
But for those of us not suffering that particular delusion, bailing out an Afghan bank makes as much sense as any other aspect of nation-building. Which is none at all.
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