Herat's industry wilts amid cheap
imports By Shahpoor Saber
HERAT - Factory owners in Herat in western
Afghanistan say they are being forced out of
business by flawed government policies that allow
foreign goods to flood into the country and leave
them unable to compete in the marketplace.
Considered a relatively safe area of
Afghanistan, Herat is among the few parts of
Afghanistan that have seen significant investment
in manufacturing. Yet nearly half the 300
factories in an industrial park established in the
city in 2005 have had to close, and the rest are
in trouble.
Initially, the business park
did well, with factories selling their wares all
across Afghanistan and providing much-needed work
for Herat's residents. As time went on, however,
they found they
could not compete with the
massive influx of goods from abroad, particularly
Pakistan and Iran.
Herat province, as the
main gateway for trade with Iran, has seen a
particularly large influx of goods from
neighboring Iran. Total Iranian imports to
Afghanistan have rocketed from a few hundred
million dollars two years ago to US$1 billion in
the financial year ending March 2011.
Hamidullah Khadem, head of the provincial
union of industrialists, reports that bankruptcies
and closures have left just 170 of the plants are
still functioning.
Analysts blame the
problem on the Afghan government's free-trade
policy which has allowed importers to bring in
items of types also manufactured inside the
country, but not with such keen economic margins.
Local producers, already operating in a risky
business climate, simply cannot compete.
Meanwhile, potential investors are
attracted by the quick gains of the import trade,
rather than the longer-term benefits of setting up
a manufacturing enterprise in Afghanistan.
The situation angers local businessmen,
who say laissez faire trade policies are totally
wrong for an economy as weak as Afghanistan's.
"The Iranians dump their poor-quality,
out-of-date products on the market at low prices,"
Khadem said. "In doing so, they've bankrupted our
factories. Meanwhile, the Afghan government has no
control of the market and has provided no support
to industrialists."
The fall in local
processed food production is apparent in Herat's
Rahmani Market. Farid Ahmad, who has a shop there,
described how confectionery, pasta, tomato paste
and other items had disappeared from the shelves.
"People ask for them when they come
shopping. But sadly, all those products have been
replaced with Iranian ones of poor quality," he
said. "Believe me, when I used to get
[Afghan-made] Gulchin tomato paste, I would sell
it all in a couple of days. I have now obtained
Iranian-made tomato paste and I'm worried about
its expiration date, because fewer customers are
buying it."
Hajji Abdul Ghafar
Hashimzadah, one of the factory owners forced to
close down, says he has lost $200,000 of the
$550,000 he invested in a bakery enterprise..
"We made a great mistake by investing
here. We thought the government and the people
would support us," he said. "No one supported us.
No one stopped the low-quality imports from
abroad. No one increased taxes on imported items.
Instead, they increased the fees, taxes and other
cost imposed on us."
Hajji Torialai, who
is deputy head of the industrialists' union and
also of the Herat Chamber of Commerce and
Industries, said the tax structure was deeply
flawed.
"The Afghan government levies
approximately 30% taxes on domestic products, but
just 2% to 4% [duty] on imports of foreign goods.
Our industrialists are therefore hugely pressured
by taxation as well as by various forms of
extortion, and that's leading them to close down."
Torialai believes the way forward is to
lift duties on imported raw materials used by
local manufacturers, and lower the taxes payable
on their finished products.
Like other
critics of government policies, Torialai suspects
there is more at work than a simple failure to
understand the economic dynamics, given the
massive profits that can be made from the import
trade.
"The president's economic advisors
are not giving him proper advice. Either their
behavior is malicious, or they have connections in
other countries, because they're harming our
nascent industry," he said.
A Finance
Ministry spokesman hit back at suggestions the
taxation model structure was flawed. Spokesman
Aziz Shams said raising duties on imported
finished goods would be out of the question until
such time as locally made equivalents were
produced in sufficient quantities.
"Our
domestic products don't meet the demand existing
across all the provinces of Afghanistan;
production in Herat isn't even enough for that one
province," he said. "If we feel that domestic
products adequately meet the demand in
Afghanistan, we will try to increase custom duties
on analogous foreign imports. If not, it will only
harm the people of Afghanistan."
Responding to criticisms that it was
damaging to allow the free market to govern in a
country like Afghanistan, Shams said that "the
system has caused some problems, but it isn't the
reason why factories in Herat have been derailed".
He accused factory owners of not
researching the market properly before setting up
in business. In addition, he cited factors like
security issues, smuggling and other cross-border
problems.
However, such arguments are
somewhat undermined by the experience of
increasing duty on non-alcoholic beverage imports
to 40%. This has strengthened the local drinks
industry to the point where it is now in a fairly
healthy state.
Economists say allowing
untrammeled free trade has had the effect of
making Afghanistan a consumer of imported goods.
Foreign trade is massively out of kilter - recent
estimates put annual imports at $5 billion
compared with just $500 million in exports,
ignoring substantial levels of smuggling in both
directions.
Mir Yaqub Mashuf, an economist
in Herat, says a more interventionist strategy
would have helped Afghanistan avoid the worst of
this free-for-all, as would greater transparency
about the total taxes payable on locally made and
imported goods.
Mashuf said it was wrong
to blame the situation on neighboring countries
and to suggest they were deliberately undermining
Afghanistan's economic capacity.
"Every
country wants to avoid losses and make a profit,"
he said. "We can't instruct foreign countries not
to export to Afghanistan. We need to design
policies that reduce demand for foreign items and
stimulate demand for domestic products."
Shahpoor Saber is an
IWPR-trained reporter in Herat.
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