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Tuesday, September 28, 2021

History suggests that Afghanistan is in for economic shock therapy — with Chinese characteristics

What Milton Freidman and his students were for distraught economies in the 20th century, China may very well become that free market pillar for Afghanistan

New Delhi |
Updated: August 28, 2021 8:19:36 am
Afghanistan crisis, Taliban news, Afghanistan latest news, Taliban control afghanistan, pakistan taliban, Afghanistan news, Pakistanis, Pakistan latest news, india news, indian expressArmed Taliban men drink tea as Taliban forces block the roads around the airport after Thursday's explosions in Kabul. (Reuters)

Written by Kartikey Sharma

Epidemics, disasters, wars, famine, coups, change in autocratic rulers have a historical similarity associated with them: They give rise to disaster capitalism. These acts of violence are almost always followed by an uptick in neoliberal economic practices, which further result in trade liberalisation, large-scale privatisation of natural resources, eradication of welfare schemes and subsidies, and the eventual destruction of common goods.

The current chaos in Afghanistan has been strategically backed by the likes of China and Russia, since the withdrawal of the United States of America left a power gap in the country. While Beijing’s interests in Kabul have been presumed in the context of managing USA’s presence in the area, its acts can be perceived as a way to manage its resource security in the region due to its commercial and economic interest in Afghanistan.

China’s eventual goal is to mine out Afghanistan’s rich mineral resources; the war-torn country is sitting on deposits worth $1 trillion or more, including what may be the world’s biggest deposit of lithium reserves. China currently has controlling stakes in cobalt mines in Democratic Republic of Congo, niobium mines in Brazil, platinum group metals in South Africa, and lithium reserves in Australia, Chile, Bolivia and Argentina. Afghanistan remained the outlier with large-scale rare earth resources and almost negligible Chinese presence. However, given USA’s exit from the region, the Taliban-controlled state may soon become part of China’s resource feeder nations.

One of the prime reasons behind Kabul’s inability to extract its reserves are (besides an overhauling level of corruption) high royalties, taxes and increased levels of government intervention. If history is any evidence, free market capital movement takes control of the economy post chaos, and eradicates any sign of government intervention. History is riddled with such examples.

When Boris Yeltsin took control of Russia through a coup following the dissolution of the USSR, he cajoled the parliament into giving him dictatorial control over the country for a year so that he could take radical steps to transform the economic state of the country. Financially supported by the Clinton administration who gave him $2.5 billion in aid, and economists from the Milton Freidman school of thought, the Russian administration implemented measures such as large-scale budget cuts, removal of price control on basic food items, including bread, and even more and faster privatisation across the oil reserves sector. Many of Russia’s top resource industries were sold off for 10 cents on the dollar, 40 per cent of an oil company was sold off for $88 million (total sales in 2006 were $193 billion). Norilsk Nickel, one of the top nickel producers in the world, was sold off for $170 million, and Yukos, one of the world’s largest oil companies, was sold off for $309 million. The economic boom soon became a capitalistic money grab as profits were taken offshore at a rate of $2 billion a month. Russia had no billionaires; by 2003, the number of Russian billionaires had risen to 17.

Similarly, Bolivia entered the 1985 elections at a time when the inflation in the country was up to 14,000 per cent. The government was advised by several high-ranking officials and academics in the west, one of whom was former Harvard economist Jeffrey Sachs that only a sudden “shock therapy” and a string of deregulation efforts could help lift the economy out of a deep slump. When Victor Paz Estenssoro was elected president that year, he went to do exactly the same, food subsidies were eliminated, all kinds of price controls were cancelled, and the price of oil was hiked by almost 300 per cent.

Further, government spending was cut significantly, state companies were downsized, and large-scale imports started making their way into the country. While the shock therapy decreased inflation, there were several serious repercussions of the reforms. Real wages dropped by 70 per cent and minimum wage never really recovered its value, per capita income had fallen to $789 from $845 in two years, and by 1987 Bolivian peasants were earning $140 a year which was 1/5th of the average income at the time.

Afghanistan, for years, has suffered the wrath of an extremely volatile state due to wars, international external forces, terrorism, and a deeply dysfunctional governance set-up. With the Taliban and their dictatorial regime now officially in control, their gross lack of understanding of governance and economic principles will lead them to do what many dictators previously have done; resort to market forces to take control. Pinochet in Chile, Paz in Bolivia, General Suharto in Indonesia and Boris Yeltsin in Russia all assumed control of their countries in the midst of turmoil which made government intervention for reforms so tenuous, that resorting to market forces seemed like the rational choice for them at the time. While China in the world’s eyes may have assumed the role of that of a big brother for the officials in Kabul, its intentions, however, are likely to remain strictly commercial and economic in nature.

What Milton Freidman and his students were for distraught economies in the 20th century, China may very well become that free market pillar for Afghanistan and induce its own brand of shock therapy in the country.

The writer is a research associate with TERI

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