Afghanistan: Finance and Security

Facts:
- 800,000 poeple around the world lose their lives to violence every year.
- One third of developing countries are considered at risk of violent conflict or chronic instability.
- Private firms report paying up to 15% of their sales revenues to protect themsleves from insecurity.
- Criminality can be a severe disincentive to entrepreneurship and investment with rule of law as a core driver of economic development.
- Conflict disrupts trade and markets and imposes "protection costs" on surviving firms.

Afghanistan has fully recognized that security is a key factor for development, most notably by including an MDG goal dedicated to security, and by including security as an integral part of its poverty reduction strategy (the Afghanistan National Development Strategy).

It has been estimated that more than 800,000 people around the world lose their lives to violence every year. Almost one-third of all developing countries are considered at risk of violent conflict or are in a state of chronic instability. Armed conflicts are a major source of economic downturns, increasing poverty, and human and social distress. Conflict and crime not only reduce the incentives for investment but also weaken physical capital, financial capital, human capital, and social capital. Conflict also disrupts trade and markets, leads to theft of business property by armed groups, and imposes “protection costs” on surviving firms-private firms report paying up to 15% of their sales revenue to protect themselves from insecurity.

There is a growing recognition among the development community of the importance of relating conflict and insecurity, and on the positive side of the linkages between security and development. This is a significant departure from a more traditional approach, where institutions in charge of development (national and international, bilateral and multilateral) refrained from involvement with security issues. There are also important two-way linkages between security and public finance which hitherto have been less factored into the thinking of the international development community.

The key lesson is that security very much matters. Lack of security directly weakens the investment climate, erodes human and social capital, and weakens public institutions.

Governments must therefore devise strategies to improve security. The work and impact of all development partners will be enhanced if the multiple linkages between security, development, and public finance are explicitly taken into account. Moreover, standard tools for analyzing public finance management, service delivery, and governance can usefully be applied to the security sector-which should not be seen as exceptional or exempt from normal budgetary and public financial management processes (even if adjustments may need to be made in some respects e.g. to take into account confidentiality aspects).

The historical legacy of conflict in Afghanistan is one of fragmentation of security in the hands of regional and local militias, exercise of policing and military functions by non-legitimate actors, and erosion of both formal and traditional justice systems. Building the state since late 2001 has entailed reconstituting and reforming the security forces under legitimate oversight by the civil authorities.

Improving security has faced a number of challenges in Afghanistan. Perceived security threats differ between different stakeholders. While the overall size of Afghanistan's security sector, even with expansion, does not seem unreasonably large by international standards, it is extremely doubtful whether the sustaining costs of the security sector at planned force levels can be absorbed by the national budget. Thus predictable medium-term external financing of Afghanistan's security sector will be required for many years to come and an update of the security sector expenditure review for Afghanistan is currently underway.

Progress in developing different parts of the security sector has been uneven; with improvements in the national police has being slow and reform and capacity building in the justice sector lagging far behind.

Although security sector expenditures require resources that could otherwise be used for other public services, improved security can also support improvements in public finances, most notably through enabling increased revenue mobilization, which in turn can provide more fiscal space. Taking a public finance management approach to the security sector has important benefits for security, development, and public finance itself.

For more information on Finance in Afghanistan, please visit Managing Public Finances for Development in Afghanistan