Production During Times of Instability

11 Jun Production During Times of Instability

My PhD research took me to Kabul where I spent nine months visiting manufacturing firms and conducting interviews. After my fieldwork, I worked for over four months as advisor to the minister of economy of Afghanistan, purportedly the main economic policymaking (or development monitoring) body in the Afghan government. Both the experiences gave me a rather comprehensive picture of where Afghanistan’s economy stands today but a more detailed discussion of my PhD findings will have to wait for a later time. I will briefly touch upon some findings of my fieldwork, spanning February to November 2018.

Afghanistan’s case stands out because it’s rare that a country with the socio-political characteristics seen here adopt a liberal market development model for its economy. In early post-Bonn Conference years, policy thinking followed a post-conflict stage and individual entrepreneurship was seen as the appropriate engine to bring growth and economic prosperity. The motto of small government was brought to Afghanistan’s context at the same time that state-building was being introduced. Later when the country begun witnessing a rising Taliban insurgency – more intensely from 2006 onward – the compartmentalized and fragmentary thinking, treating “economics” and “politics” as two separate domains, did not allow for breaking the rigidity of thought and for adjusting the country’s economic policy with the prevalent political conditions.

An enabling environment to induce private investment was and remains as the cornerstone of policymaking approach. It was because of such a politico-economic environment that I found my topic of research intriguing: why is it that private investors choose to invest capital in secondary sector which involves a high level of commitment comparing to trade and services, in a country witnessing high levels of political instability (or war, depending on the viewer’s perspective) while there are no bureaucratic interventions by the state to support it (if not causing outright hindrance)?

I conducted my structured in-depth interviews along four parameters: 1) economies of scale or a descriptive analysis of the investment size; 2) social class affiliation of the investor and reliance on social capital; 3) structures of economic governance; i.e., decision making modalities; and 4) incentives for business continuation.

In other words, how the size of investment, membership in social groups and local knowledge acquisition through this membership, decision making structure within the enterprise and personal incentives for continuing the business affect productive capital localisation and reproduction in Kabul.

My research covered 63 entities, seven with officials and 56 with companies, which can be considered as a good representative sample if registered businesses are included. There are between 200 to 250 manufacturing units registered for Kabul province with the Afghanistan Industrial Association. I ran conversational interviews almost all in lay Farsi (Kabul dialect). Open-ended questionnaires were preferred because of allowing respondents to elaborate in their own words and to grasp a richer experiential account. Government and international reports were used for background research with little reliance on data from businesses themselves apart from answers to the questionnaire because of issues of credibility – I found investors apprehensive to share non-compromised data with outsiders.

My preliminary findings cover governance, labour, production and other domains are as conveyed below.

With regards to the structure of economic governance, in majority of the cases, manufacturing units are owned by a single investor or members of a family – designed along a patriarchal hierarchy pervasive in society at large – and in a rare number of cases, by a group of shareholders who are close friends if not members of a kinship. Both these ownership/managerial styles minimize operational differentiation – the same person who owns the company usually also operates as chief executive officer and takes care of major decision-making activities. This can be attributed to a few factors such as: 1) small investment size; 2) trust deficit between the employee and the employer; 3) absence of shareholder diversification; 4) cultural management style; and 5) heightened sense of risk.

In terms of labour, rarely any firm followed the Afghan labour law, which is scarcely enforced by the authorities in-charge. There was one labour union mentioned which is a relic of the pre-war years and plays an insignificant role. Gender balance in ownership and recruitment was minimal in the cases I investigated. Non-wage assistance for workers is dependent on altruism and not any contractual obligation.

Manufacturing followed order-based production rather than a pre-defined production capacity that is responsive to price elasticity. What this means is that companies have been established with an eye on the level of demand and there is a sense of immediacy (or short-termism) that dominates investor attitude. Orders are taken and based on them production takes place. Pre-production and assembly line style of production is rare. In some cases, the move from secondary to tertiary sector (usually, although not always, the case in the development pattern in preceding history) is reversed; i.e., the need for a manufacturing plant is felt only as an extension of a service sector driven economy.

Hence, price as a signal of efficient allocation is irrelevant and is replaced by pre-production direct negotiation.

Credit acquisition was largely done from private sources due to the absence of state industrial policy or other means of channelling savings to investment. Commercial banks charge a high interest rate and exorbitant collateral, which makes it difficult to rely on them.

Units under my investigation were most often members of some business associations, but only for non-production related bargaining (mostly for pushing ahead paperwork processing).

The prevalence of social class affiliation dynamics meant that producers thought of themselves as members of the lower or upper middle class (not among the wealthy and well-off). Based on assessments of their social standing they chose friends from among other industrialists, tradesmen, or individuals they’ve known since childhood – some burgeoning signs of social stratification can be witnessed – they sent children to private schools, and mostly relied on exclusionist tactics and unhealthy competition among themselves, eroding cross-firm cooperation and trust-building.

The impact of insecurity on production has propelled a short-termist tendency, particularly from 2014 onwards.

Backward and forward linkages is minimal. Due to the trust consumers and project clients have on imported raw material and unavailability of domestic intermediate goods, manufacturing units function as insular islands so far as contact with other activities in the domestic economy is concerned.

Incentives for Production Continuation:

As for the question “why manufacturing in times of instability?” majority of the investors replied: “it was my passion from childhood to produce” (or other non-economic reasons if you would), which brings to serious doubt, on an ontological level, the assumption that humans are rational profit-maximizing economic agents equipped with adequate calculation ability and supplied with perfect information. Other reasons for this were a fatalistic belief in a “better future”, sale on credit which tied the producers to a pool of clients in need of constant and regular supply (one cannot close down because of the risk of losing contact and substantial reduction in the possibility of retrieving the remaining instalments), asset specificity and sunk capital.

Conclusion

Afghanistan’s case remains an important instance of many politico-economic and sociological factors coming together both as part of a deliberate economic design and as a result of pre-existing social institutions, to put the secondary sector in a particular trajectory of growth. Many assumptions of human rationality will have to be reassessed to accurately understand the incentives of productive capital localisation by investors who, due to myriad reasons, have chosen to invest money in the secondary sector despite knowing the many obstacles are present in the political and economic environment of Afghanistan. My research aims to play a role in illuminating some aspects of this politico-economic process that I believe will be relevant for the larger developmental literature.

Kambaiz Rafi is a PhD candidate at the Development Planning Unit, University College London.