Fiscal crisis raises questions on future of Afghan aid

A man rides a donkey past a signpost at the entrance of the combat outpost Unicorn near the city of Baglan December 4, 2011.

BONN (Reuters) - When world leaders gathered in Bonn in December 2001 to discuss Afghanistan's future after the fall of the Taliban, it would have been hard to imagine that a decade and hundreds of billions of dollars later the country would still be mired in conflict and nowhere near able to pay for its own soldiers and bureaucrats.

An unprecedented Western aid effort since 2001 has made some major strides since the Taliban government's repressive isolation, especially in improving health care and women's rights and building roads and other infrastructure needed to nudge Afghanistan toward the global economy.

But serious questions remain about the long-term impact of foreign help and, even more pressing, as Afghanistan's supporters gathered on Tuesday to discuss the country's future ten years on, about future levels of aid for a country years away from being able to sustain itself, given severe budget pressures in the United States and Europe.

Despite promises of long-term support from over 80 foreign ministers attending the conference in Bonn, aid levels are set to fall dramatically as most Western combat forces withdraw over the next two years.

Afghanistan currently receives about $16 billion a year in outside assistance, and two-thirds of aid goes to security, multilateral lenders say. A recent World Bank report said Afghanistan was likely to need around $7 billion a year to help pay its security and other bills until 2021.

But securing even that amount, far below current Western spending, could be difficult at a time of severe budgetary pressures in the United States and Europe.

The World Bank has warned that the reduction in foreign aid could have a "profound impact" on Afghanistan.

"A rapid drop of aid would undermine the government and potentially undo the progress that has been made," said Louise Hancock, a policy advisor with aid group Oxfam in Kabul. "What is needed is a gradual and predictable reduction of aid over time which allows the government and its partners to plan accordingly," she said.

Even with the huge inflows of military and civilian aid in the past ten years, life remains precarious for most in Afghanistan. As the war has ground on, per capita income has remained one of the lowest in the world, now around $528. Only 18 percent of adults are literate, and the average person can expect to live only to 48.

Afghan President Hamid Karzai told the meeting the Afghan economy had made great strides from its "dismal baseline" in 2001, but said persistent poverty, corruption and imperfect aid schemes continued to hobble its progress.

TRANSITION DIVIDEND

Both Afghanistan and Western countries have been discussing what they call a "transition dividend" that would funnel toward aid and reconstruction at least a small portion of the tens of billions of dollars the West is set to save by withdrawing troops.

Looking more broadly to include regional powers that have not sent troops to Afghanistan, Afghan officials spoke in Bonn of a "transformation decade" of assistance from 2014.

While the Bonn conference was not aimed at securing pledges of future aid, it launches a process that will aim to secure funding for the Afghan armed forces at a NATO summit in Chicago in May and support for the country's economy at a meeting in Tokyo in July.

Western politicians and diplomats have said it is difficult to estimate how much will be required to sustain the Afghan armed forces. A European diplomat said his best guess was $4 billion in a range of $3-6 billion, while an Afghan official put the figure at up to $7 billion.

The European diplomat said much would depend on the how large the armed forces would need to be. While projected to reach 352,000 next year, some suggest that a force of 250,000 or less might be more realistic.

European diplomats said the United States, which has paid the bulk of the running costs of the Afghan army but now faces about $1 trillion in cuts to national security spending over the next decade, was pressing cash-strapped Europeans and others to take some of the burden. Washington is offering to pay only a third of the bill, they said.

For their part, Afghan leaders are quick to link their country's plight to security in the West. No one wants to see Afghanistan again become a haven, they say, for plotting militant attacks such as those of September 11, 2001.

Afghan Deputy Foreign Minister Jawed Ludin said he believed decision-making would be driven by needs rather than finances.

"COST WORTH PAYING"

"People are aware that compared to what has gone into Afghanistan in terms investment and money terms and the sacrifices � What we will need will be much much less -- really a fraction, a very, very small fraction and that will be a cost worth paying," he said. "Nobody is going to jeopardize that for the sake of a couple of billion dollars of investment."

The United States and the European Union stand to make huge savings as they cut their troop numbers. Ludin estimated that the United States was currently spending $110 billion a year on its military effort in Afghanistan while its European and other allies paid perhaps another $50 billion.

Yet to a large extent fiscal realities in the West will define future aid just as much as the concerns that have traditionally driven aid decisions -- Afghanistan's needs and the security risks that insufficient assistance would pose.

Europe's preoccupation with its financial crisis was underscored when German Chancellor Angela Merkel slipped away from the conference after about an hour to meet French President Nicolas Sarkozy to try to forge a deal that would restore faith in euro zone nations' ability to repay their debts.

U.S. President Barack Obama, meanwhile, is facing intense pressure to cut costs and create jobs ahead of his November 2012 re-election bid.

U.S. Secretary of State Hillary Clinton told reporters that the United States was "prepared to stand with the Afghan people, but Afghans themselves must also meet the commitments they have made, and we look forward to working with them to embrace reform, lead their own defense, and strengthen their democracy."

AID "POORLY STRUCTURED"

Not all observers believe that reducing aid, given a record of corruption and high spending on contractors and security, is a bad thing.

A Brookings Institution survey found that only 43 percent of what has been pledged by world donors to Afghanistan since 2002 had actually been disbursed by the end of 2009, which may be due in part to Afghanistan's failure to meet shortcomings, bureaucratic bottlenecks, and political ambitions that haven't matched financial realities.

Joshua Foust of the American Security Project, a Washington think tank, said that despite a number of important achievements, the Western aid model had not evolved sufficiently over the past decade.

"We're not even more up front about what the fundamental problems are. You can find books written in 2005 about why aid is poorly structured, why it is an especially poor value for its cost, and why it will be so ineffective, yet those exact same complaints can be credibly levied against the aid community right now." (Additional reporting by Arshad Mohammed; editing by William Maclean)