Abdullah Adil

Import Substitution in Afghanistan, Potentials and Risks

Volume | 016 Bochum/Kabul | 2016 www.afghaneconomicsociety.org

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Import Substitution in Afghanistan, Potentials and Risks

Abdullah Adil

Keyword list: Import Substitution, Import Substitution Industrialization (ISI), Trade Policy,

Revealed Comparative Advantages (RCA), Import Substitution in Afghanistan.

Abstract

This study has focused generally to examine the possibility of Import Substitution (IS) strategy

and its potentials and risks for Afghanistan. It seeks to evaluate theoretical rationality based on

past experiences of IS and draw lessons for Afghanistan. Furthermore, it attempts to rank the

sectors with higher Comparative Advantages (CA) by using Revealed Comparative Advantage

Index (RCAI), and then select the most promising sectors among them for IS. The analysis is

followed by complementary measures such as falling Import to GDP ratio. This study was set out

to analyse the foreign trade data of the country over one decade and examine the possibilities of

IS. Based on the experiences of the most successful countries, it has concluded that they used

mixture of IS and Export Promotion (EP) strategies in the right time along with good

implementation plans. Empirical findings of the study showed that Afghanistan has higher

comparative advantages in the sectors with low-skilled labor, this result has been confirmed by

adverse argument that there are revealed comparative dis-advantages in capital-intensive or

high-skilled labor intensive sectors. The empirical result of the study showed that in Afghanistan

during the last decade the IS has taken place in the right direction.

Description of Data

This study has been organized in two major parts. The first part was devoted to the theoretical

evaluation of the experiences of other countries by looking to their success and failure stories in

order to derive theoretical and experience-based lessons for Afghanistan. The second part has

focused on the empirical analysis of CA using RCAI measure. The data for empirical analysis has

been collected from different official reports such as Afghanistan Statistical Yearbooks and

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Afghanistan Trade Statistics Yearbooks1, published by Afghanistan’s Central Statistic

Organization (CSO). The data contained information related to GDP, Foreign Trade, and

Consumer Price Index CPI for the years 2002-03 to 2011-122.

RCA index has been calculated for 20 aggregated categories (sectors) in which 9 were export categories and 11 were import categories (see Appendix 1,2). The estimates have been made for

10 years (2002-03 to 2011-12) in order to examine the changes of revealed comparative

advantage over the sufficiently long period which is known as a decade of the most ever liberal

trade for the country.

The trade data recorded and valued in current prices were expected to be influenced by national and international price shocks. Therefore, the available trade data has been converted into real

values3 using national CPI4, however, the data for GDP was already available in constant prices5

which was calculated by GDP deflator.

Moreover, as the classification system of trade data in Afghanistan is not upgraded yet to the

worldwide accepted standards such as Harmonic System (HS) or Standard International Trade

Classification (SITC) system, therefore the traditional classification of trade data used by CSO

was exactly applied for analysis, because the data have been already recorded under traditional

classification system.

Research Questions/ Theoretical contextualization

Nearly each single country in some stages of their development considers Import Substitution

Industrialization (ISI) as a valid development policy option. It is usually treated as a trade policy following the theory of infant-industry protection in the context of development economics (Liang,

1993, p.4). Through this strategy countries attempts to reduce foreign dependency of the

economy by replacing importing goods to locally produced products. Import Substitution (IS) as

inward-looking development strategy is a situation where countries want to establish domestic markets for its own products by pushing imported goods out of the market (Kjeldsen. K., 2001,

p.225). ISI as a historical phenomenon should be distinguished from ISI as deliberate

development policy. Historically ISI is known as a strategy practiced by Less Developed Countries

1 There were problems in the published data and slightly difference in individual and aggregates which has been filtered and the data used in this study may differ slightly due to recalculated figures. 2 All figures were converted from Solar Hijri calendar which is the official calendar of the government of Afghanistan. 3 The nominal values of trade data has been transformed to real values using formula of : Real Value = 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑣𝑣𝑛𝑛𝑛𝑛𝑣𝑣𝑣𝑣 𝑪𝑪𝑪𝑪𝑪𝑪 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑦𝑦𝑏𝑏𝑏𝑏𝑦𝑦

𝑪𝑪𝑪𝑪𝑪𝑪 𝑐𝑐𝑐𝑐𝑦𝑦𝑦𝑦𝑏𝑏𝑐𝑐𝑐𝑐 𝑦𝑦𝑏𝑏𝑏𝑏𝑦𝑦 The base year for calculating real value is 2002-2003.

4 The GDP deflator is mostly dealing with internal production, therefor the CPI was used for calculating real values of trade data because the CPI is rather broader concept to represent the overall inflation in the country for all trade or non-trade products. 5 The base year for calculating real value is 2002-2003.

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(LDCs) in response to external trade by producing domestic substitutes of imported products.

However, a deliberate ISI policy is a tool that LDCs may use it for structural changes and

industrialization in their countries (Liang, 1993, p.4).

In theory, the economic rational and theoretical reasons for the original ISI strategy sounds logical

and persuasive, the basic objective of the import substitution is to push an economy to continuous

learning process and to sustainable productivity. The theory of protection and infant-industry

argument are quite straightforward economic foundations for ISI strategy. It allows governments

to protect their domestic import substituting industries for a sufficient time until they learn by doing

and achieve economies of scale. As a result the industry will produce efficiently and enter to the

domestic and international competitive markets.

Theoretical argument of infant-industry and the potentials of the CA of domestic manufacturing

industries played the most important role in promoting the idea of ISI strategy. Based on the

argument of infant-industry, the newly established industries in developing countries which may

have a potential of CA in the future, cannot initially compete with well-established manufacturing

industries in developed countries, therefore, the government should support these new infant industries temporarily till they get strong enough to compete internationally (Krugman & Obstfeld,

2003, p.256). Countries typically uses import tariffs and quotas as a first common step to open a

window for industrialization in the country. In the early stages of protection, domestic infant

industries can start initially with less capital and available technology behind trade barriers in order to replace imports from abroad (Stutz & de Souza, 1998, p.416). Many developing countries which

aims to have rising welfare in the future needs to be protected from foreign competition in some

stages of development in order to create internal capacity with newly modified structure of

economy and competitive economic activities which could survive later without protection, thus

relatively stronger and responsible economy can create opportunities domestically and take

advantages from opportunities available in the international market.

A very intensive form of IS strategy is inward-looking ISI practices which promote domestic industries at any cost for the economy. This version of ISI has been highly criticized and it is

almost out of practice now. A very rational form of strategy called outward-looking ISI which is

based on infant-industry argument and provides salvation of appropriate form of protection as a development tool which focuses on an export-based sustainable growth (Gillis, et al, 1992, p.458).

Many economists and policy makers are now looking critically to the results of ISI strategy brought out from experiences and economic arguments (Krugman & Obsfeld, 2003, p.267), the risks

associated with the IS strategy call for very cautious implementation. The practice of ISI during

last few decades produced both success and failure cases which raises the question that why

such controversial experiences are existed? The answer to such a contradictory result from the

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practices of same strategy (ISI) is different depending on protectionists and/or liberalists views of

trade.

Afghanistan is a developing and land-locked country located in the central Asia, the economy of the country is structured in a typical traditional way dominated by agriculture sector. Since 1950s (Eltezam, 1966, p.96) the country was continuously in trade deficit position, because the domestic

sector produced only small portion of primary and agricultural commodities, while almost all the

manufacturing products such as energy and food have been imported from other countries. Such

import-dependency does not necessarily mean that the country has comparative dis-advantages

in all sectors where imports takes place. However, Afghanistan is rich by having natural

resources, it is labor-abundant and have a good geographical location. These opportunities can

be utilized when the economy is directed to the right direction and the government could provide

the necessary economic infrastructure and political stability.

Several studies about Afghanistan have tended to focus on available business opportunities such as cheap labor supply, favorable legal and regulatory facilities…etc. to attract Foreign Direct

Investment (FDI).6 However, IS as industrial and development strategy was less discussed in

this context; most of the studies regarding trade and business have only been carried out in small number of areas for instance focusing only on few agricultural products and mining sectors (World

Bank, 2004) and (Habibullah, 2010). This study aims to examine the possibility of Import

Substitution (IS) and its potentials and risks in the context of Afghanistan, it seeks to address the

following two fundamental questions:

• Is import substitution recommendable for Afghanistan?

• Which sectors in the country can qualify for substituting imports?

The first question has been answered by theoretical evaluation of the ISI strategy and by looking

closer to the past (success and failure) experiences of other developing countries, which made it

possible to derive theoretical and experience-based knowledge in order to see what Afghanistan

can learn from experiences of the other countries. The second question has been answered by

using Revealed Comparative Advantage Index (RCAI) to rank the sectors by their higher

Comparative Advantage (CA) and then select the most promising candidate sectors for import

substitution.

6 Most of such studies conducted by Afghan Investment Supporting Agency AISA. (AISA organization is now integrated with the Ministry of Commerce and Industries)

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Field research design/ Methods of data gathering

The main objective of the study was to identify promising candidate sectors for import substitution7

(by calculating indirect measure of comparative advantage because the direct measuring of CA

is not feasible in free trade situation8) using last 10 years’ foreign trade data of Afghanistan.

keeping in mind all the shortcomings and limitations of the method, the RCA index was applied

on available data across sectors (defined and classified by CSO as export and import categories)

over period of analysis, in order to rank and select highly promising sectors for import substitution.

Among various proposed versions of RCA indices, the simple version of RCA index has been

selected because through this version the cross-sector analysis within the country was possible.

As long as the index relied only on the trade data the declining import to GDP ratio was used as

a complementary indirect sign of IS exposed during the last decade for several domestic sectors,

this was relevant step for the study because the index does not explain the relationship of trade

with the rest of the economy, therefore, through this ratio one can check the trade to GDP

performance of the candidate (selected by RCA index) sectors.

The major limitation of the empirical analysis arises from two fundamental problems; First, the

conceptual shortcoming of the RCA index measure. Second, lack of information (less

representative data) about the economy of Afghanistan which is characterized as post-war, less-

developed, large informal sector, and a country with corrupted public sector. It is important to

mention that due to large informality in Afghan economy one cannot claim that the official trade

data explains exactly the real picture of the foreign trade, besides informality a considerably high

volume of duty free imports ( flowing to foreign military forces, embassies, NGOs and ministries )

and smuggling along uncontrolled lengthy borders with Pakistan, Iran and central Asian countries

are considered as other major problems which makes the official data less representative for the

analysis. However, the pattern of officially recorded data is expected to have sufficiently matching

fashion if the informal data would be added to the official available data. Many other data sources

which are based only on estimates provides statistics under different assumptions and calculation

periods. However, this study relies on the only officially accepted data from central statistics

organization of Afghanistan (CSO) which was systematically available for last 10 years.

Referring to the methodology used in this study, it is important to mention that the results of RCA

index which is directly calculated for actual trade data over specific time period are analyzed and

7 The RCA index used in this study as an indicator that ISI has taken place, not to evaluate the ISI. 8 The main empirical problem of measuring comparative advantage (looking at the unit cost of production and its underlying prices) comes from the fact that autarky prices of traded commodities are not observable because almost all countries have been already engaged in trade internationally or at least with a number of trading partners. It means that products (which are considered for its prices before and after trade) are already traded and the production is more or less specialized (see Moenius 2006, p.16) . The only way to measure comparative advantages remains to rely on past trends and composition of trade (exports and/or imports) by looking to patterns of actual trade between countries and past export and import data.

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interpreted in a few steps: First; overall RCA index is calculated both as simple and weighted

average of 10 years. Second; the most promising and well-performing RCA Sectors have been

discussed in details, and third, the discussion has further been followed by analyzing import to

GDP ratio for different selected sectors, in order to interpret the results critically in the context of

Afghanistan. The index formula used in this study makes reference to the Afghanistan’s trade

performance during the time period of (2002-03 to 2011-12), and recognized the possibility of

simultaneous exports and imports within a particular sector (or product category).

𝑅𝑅𝑅𝑅𝑅𝑅 =𝑋𝑋𝑛𝑛𝑋𝑋 −𝑀𝑀𝑛𝑛𝑋𝑋𝑋𝑋𝑛𝑛𝑋𝑋 + 𝑀𝑀𝑛𝑛𝑋𝑋

Where X refers to export, M=import, i = country, j = commodity, category or industry.

The index value ranges from -1(Xij=0 indicating extreme of comparative disadvantage) to

+1(Mij=0 indicates extreme revealed comparative advantage), the index values in between can

be used to rank the sectors in ordinal manner, however, there is ambiguity in interpretation of

index with zero values. The mentioned index has been calculated for 20 aggregated categories

(sectors) from which 9 were export and 11 were import categories (listed in Appendix 1,2).

Estimates have been made for 10 years (2002-03 to 2011-12) to clearly examine the changes of

revealed comparative advantage over the sufficiently long period of time which is known as a

decade of most ever liberal trade for the country.

Although, in this period the average inflation rate was somehow in acceptable level but the world

price shocks and the cross-border blocking behavior of the neighboring countries caused to push

upward the prices of strongly demanded goods in the country (which is mostly imported such as oil and food) to very high level (MoE, ANDS progressive report, 2011, p.5), thus the trade data

recorded and valued in current prices was expected to be influenced by price shocks. Therefore,

the available trade data has been converted to the real values using national CPI while the data

for GDP was already available in constant prices9 calculated by GDP deflator.

The classification of trade data was another challenge for the analysis of Afghanistan’s foreign

trade data, for instance in some cases the classified categories were not well defined and more

dissimilar products treated under single class in a very comprehensive manner. Also, the

classification system of trade data in the country is not upgraded yet to the worldwide accepted

standards such as Harmonic System (HS) or Standard International Trade Classification (SITC)

system, this would be important if one compare cross-country trade data which was not the

objective of this study, therefore the traditional classification of trade data published by CSO has

been exactly applied for the analysis.

9 The base year for calculating real value was 2002-2003.

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Results

Based on empirical analysis of foreign trade during mentioned period, this study has produced

clear results from RCA measurement in few steps: (1) RCA ranking for the overall weighted

average of the all aggregated categories. (2) Comparison of RCA ranking for the first and the last

year of analysis. (3) Further side by side analysis of RCA trends with Import/GDP ratios and its

percentage share in imports.

Table (1) shows the results from overall RCA index, the table provides sector ranking obtained

from two average values (simple mean and weighted average)10 calculated for 10 years’ trade

data. The results of ranking were identical, however, the magnitude of index values differs for

most of the categories. Highly ranked categories such as agriculture, livestock, and handmade

industries are the sectors with CA for the country while the lowest ranked categories such as light

manufacturing, heavy industrial products, cares and machinery are the sectors with comparative

dis-advantages. It signals that the source of CA for the country laid in low-skilled labor

endowment.

In the top rows of the Table (1) the first 9 categories (which contained around 60 different items)

have revealed CA, and the country was net exporter of mentioned products, the nature of these

categories can be separated by consumer goods (hand made final products) and raw materials

(agricultural and nonagricultural). Categories which showed index values close to zero (such as

sausages and papers) can be interpreted as less important categories in the trade. The lower

rows of the table (ranked from 10-20) shows categories in which Afghanistan has comparative

dis-advantages and the negative sign of RCAI indicates that all 11 categories (which contained

more than 90 items) are heavy and light manufacturing products, petroleum and food items.

Table (2) compares the RCA ranking for the first (2002-2003) and last year (2011-2012) of

analysis. It shows how ranking order has been changed for different sectors within this period. In

2002-2003 Afghanistan was net exporter of the 8 trade categories (with positive index values)

and only one category (sausages with zero index value) was nearly out of exports. categories in

which Afghanistan had revealed CA were: Fruits, Livestock, and Handmade products from which

the most promising export category was dried fruits with (RCAI=0.0227) while the carpets (0.005)

skin (0.0036) and fresh fruits (0.0034) were second, third and fourth categories respectively which

showed higher CA than other categories.

10 The intention of calculating weighted average was to examine the possible different ranking order of the sectors based on their importance in terms of their share in trade.

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Table 1: Overall RCAI ranking based on simple and weighted average values (2002/03–2011/12)

Commodity groups RCAI for Mean* Ranking

RCAI for Weighted average**

Commodity groups

Carpets and rug 0.0441 1 0.2134 Carpets and rug

Dried fruits 0.0331 2 0.1201 Dried fruits

Fresh fruits 0.0061 3 0.0042 Fresh fruits

Skin 0.0052 4 0.0040 Skin

Medical plants 0.0047 5 0.0037 Medical plants

Wool and Cotton 0.0025 6 0.0011 Wool and Cotton

Seeds 0.0011 7 0.0002 Seeds

Spices 0.0009 8 0.0001 Spices

Sausages 0.0002 9 0.0000 Sausages

Paper -0.0006 10 0.0000 Paper

Clothing materials -0.0031 11 -0.0001 Clothing materials

Cigarettes & drinks -0.0174 12 -0.0035 Cigarettes & drinks

Construction materials -0.0307 13 -0.0114 Construction materials

Chemicals materials -0.0318 14 -0.0183 Chemicals materials

Fabrics, clothing, & footwear

-0.0643 15 -0.0704

Fabrics, clothing, & footwear

Metals -0.0880 16 -0.0975 Metals

Food items -0.1280 17 -0.1865 Food items

Petroleum -0.1327 18 -0.3235 Petroleum

Dishes & medicine -0.1952 19 -0.4340 Dishes & medicine

Machinery & equipment -0.2124 20 -0.5445 Machinery & equipment

* The simple mean is calculated for each commodity group for 10 years (2002-03 to 2011-12) ** Weighted averages are calculated for each commodity group considering the share of each commodity in

exports/imports, but the simple mean has been taken for total trade over same period of time. Source: CSO Export and import data.

In the same year, the country was net importer of 10 aggregated categories (with negative RCA

index values). Machinery & equipment were commodities with the highest (-0.41) revealed

comparative dis-advantage, and similarly, dishes & medicine (-0.2), fabrics, clothing &footwear (-

0.13) and food items (-0.09) were other major import categories which had revealed higher

comparative dis-advantages respectively. Only one category (paper) showed zero RCA index

value and it can be interpreted as less or not important category of imports anymore.

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Table 2: RCA index values for Afghanistan's Trade categories (2002-03, 2011-12)

Export Categories RCA index

Import Categories RCA index

2002-03 2011-12 2002-03 2011-12

Fresh fruits 0.0034 0.0013 Machinery & equipment -0.4079 -0.1420 Dried fruits 0.0227 0.0173 Petroleum -0.0056 -0.3108 Medical plants 0.0018 0.0067 Metals -0.0061 -0.0883 Spices 0.0004 0.0004 Chemicals materials -0.0676 -0.0078 Seeds 0.0004 0.0006 Construction materials -0.0213 -0.0365 Skin 0.0036 0.0024 Paper 0.0000 -0.0006 Wool 0.0014 0.0017 Clothing materials -0.0055 -0.0012 Sausages 0.0000 0.0001 Food items -0.0869 -0.1279 Carpets and rug 0.0055 0.0251 Cigarettes & drinks -0.0202 -0.0232

Fabrics, clothing, & footwear -0.1346 -0.0235 Dishes & medicine -0.2051 -0.1825

Source: CSO Export and import data.

In the last year of the analysis (2011-2012) the ranking has changed significantly for both export

and import categories. Among the net export categories, carpet & rug has shown significantly

higher CA (0.025) and took the first position in terms of RCA index ranking, however, the fresh

fruits got lower ranking in the last year compared to 2002-2003. Although the exports of the

country is still dominated by primary and handmade products, the most prominent feature of the

export sector was the shift from pure agriculture (land-intensive) to handmade carpets and rug

(low-skilled labor intensive).

Table 3: Change in ranking order of RCAI for the Trade categories (2002-03, 2011-12)

Export Categories RCA ranks

Import Categories RCA ranks

2002-03 2011-12 2002-03 2011-12

Dried fruits 1 2 Paper 1 1 Carpets and rug 2 1 Clothing materials 2 2 Skin 3 4 Petroleum 3 11 Fresh fruits 4 6 Metals 4 7 Medical plants 5 3 Cigarettes & drinks 5 4 Wool 6 5 Construction materials 6 6 Spices 7 8 Chemicals materials 7 3 Seeds 8 7 Food items 8 8 Sausages 9 9 Fabrics, clothing, & footwear 9 5 Dishes & medicine 10 10

Machinery & equipment 11 9 Source: CSO Export and import data.

The highly-ranked export categories with highest RCA index can be interpreted as sectors of

highest CA. Thus, according to the concept of factor endowments in the international trade theory,

the low-skilled labor force (first ranked handmade carpets) and more suitable nature and land (in

second highest ranked fruits) was behind the revealed CA of Afghanistan’s exports (factors

endowments). It means, RCAI ranking shows the strength of low-skilled work force endowment

in the country compare to other factors such as land endowments or better climate. this is an

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important result for the analysis of IS because such a result can have important implication for

selecting sectors for import substitution.

Similarly, the change in ranking order occurred in net import categories too. Table (3) shows the

ranking11 for the first and last year of the analysis obtained from RCA index values in Table (2).

The changes in import categories can be separated into two opposite directions: Frist, change

toward increasing imports such as petroleum (from 3 to 11) and metals (from 4 to 7). Second,

change toward decreasing imports such as fabrics-clothing-footwear (from 9 to 5), chemical

materials (from 7 to 3) and machinery-equipment (from 11 to 9). Such a structural change within

the import categories were the result from recent economic developments.

Source: Ratios calculated based on CSO Export, import and GDP data.

Based on the general interpretation of RCAI the rising tendency indicates the higher revealed CA.

In the case of import categories where the RCAI is always negative, the rising tendency in index

value (from negative to zero) means that probably the IS takes place. Therefore, in the next step

of analysis the nature and changes in imports were deeply analyzed to examine the potential and

possibility of import substitution. There have been some categories in imports that indicated the

rising trend of RCA index over the last 10 years, however, the interpretation of such a rising index

values can be different for each single category. Machinery & equipment, chemical materials,

clothing materials and fabrics-clothing-footwear (ranked in aggregate RCA index as last 20th,

14th,11th and 15th respectively) were the most interesting categories which have had rising RCAI

during the last decade, however, there were categories such as petroleum, metal and construction

11 For simplicity, the export and import categories were ranked separately. For export category the rank 1 mean

higher RCA ratio thus higher export, for import categories rank 1 means negative but closer to zero RCA ratio thus lower imports and rank 11 means the higher importing category.

Figure 1: Trends for fabrics, clothing and footwear categories

-0,135

-0,024

-0,200

-0,150

-0,100

-0,050

0,000

0,050

0,100

0,150

0,200

0,250

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

ratio

s

RCAI Imp/GDP % in imp

11

materials which have shown decreasing RCAI and the rest of the import categories have not

shown any clear trend.

For the most promising category (with rising RCAI) of fabrics-clothing-footwear; all measures

(rising RCAI, falling Import/GDP and falling percentage share in Imports) indicated IS over last 10

years (Figure 1). In 2002 this category was ranked by RCAI as 9th, but it changed to better position

(5th ). This category contained 12 sub items which is mostly new cloths, plastic footwear and other

fabrics. nearly all imported items in this category were also produced domestically.

Source: Ratios calculated based on CSO Export, import and GDP data.

Another promising category was clothing materials, which showed IS across all measures (figure

2). This category contained 5 items (yarn and artificial cotton), it was ranked in aggregate average

RCAI as 14th, for both 2002-2003 and 2011- 2012 years it was ranked as 2nd. Similarly, the import

to GDP ratio and percentage share in total imports were falling for this category. In this category,

the cotton and woolen products were imported and at the same time domestically produced.

Furthermore, this category is important for top ranked exports of the country because it provides

raw materials and inputs for most of the handcrafts and homemade products. Two other important

categories (chemical materials and machinery & equipment) also showed rising RCAI and falling

import to GDP ratio. However, it cannot be interpreted as the case of import substitution for

several reasons.

As figure (3) shows the RCAI is rising but the import to GDP ratio is nearly constant. One cannot

interpret this as an import substituting process because other measures such as import to GDP

ratio is not declining significantly. Moreover, there are many other reasons for declining imports

of cars and its complementary products, therefore, in this particular case the rising RCAI cannot

represent import substitution.

Figure 2: Trends for clothing materials category

-0,010-0,008-0,006-0,004-0,0020,0000,0020,0040,0060,0080,010

Ratio

s

RCAI Imp/GDP % in imp

12

Figure 3: Machinery & equipment

Source: Ratios calculated based on CSO Export, import and GDP data.

To sum up the results, it is suggested that the categories in which Afghanistan has CA is low-

skilled labor-intensive sectors. Afghanistan has an abundant low-skilled labor force and suitable

climate for agricultural products. Therefore, both the net export categories (with highest positive

RCA index ranking) such as carpets and fruits, and the net import categories (with rising tendency

of RCA index from negative towards zero) such as clothing, footwear and fabrics are all low-

skilled labor-intensive industries.

It has been proven that there are trends in some import categories (which has the nature of low-

skilled labor intensive products) towards IS. Also, the rising RCA index, falling import/GDP ratio

and decreasing percentage share in total imports was observed which clearly indicates IS in these

categories. Additionally, the expansion of domestic production in similar industries further

confirms the result from RCAI and other measures. These import categories with negative RCAI

ranking (but rising tendency of index) is not importing due to comparative dis-advantage but due

to undesirable economic and political situation of the country. Therefore, initially it calls for

extensive support to get start and grow in safe atmosphere to be efficient and competitive in the

future.

Conclusion

ISI is usually treated as a trade policy, which follows the theory of infant-industry argument in the

context of development economics. Despite its attractiveness for LDCs, ISI suffers from several

drawbacks, especially if it is implemented without considering its costs and benefits. Over the

past century, there have been both success and failure cases of ISI practices. In context of

Afghanistan ISI can be considered as a good development policy and departure point through

-0,500-0,400-0,300-0,200-0,1000,0000,1000,2000,3000,4000,500

RCAI Imp/GDP % in imp

13

which the country can restructure the economy in a way to utilize the available opportunities and

create a flexible and responsible economy for competition and global dynamics in the future.

An indirect method of RCAI measure has been applied on trade data to identify promising sectors

for IS in the context of Afghanistan. The overall RCAI results showed that the major net export

categories which have revealed CA were consumer products and raw materials. Moreover, RCAI

has shown up the negative sign and revealed comparative dis-advantage for other 11 categories

which are heavy and light manufacturing products. Furthermore, the change in RCAI ranking

(compared for the first and last year of the analysis period) showed that the ranking has changed

significantly for both export and import categories. In exports the carpet & rug jumped from 2nd to

the 1st position, while the fresh fruits went down to the 6th position. Likewise, the changes in import

categories took place in two opposite directions: first, changes towards increasing imports such

as petroleum (from 3 to 11) and metals (from 4 to 7). Second, changes towards decreasing

imports such as fabrics-clothing-footwear (from 9 to 5), chemical materials (from 7 to 3) and

machinery-equipment (from 11 to 9). Additionally, a critical analysis of RCAI results has been

done by using complementary measures to confirm whether import categories with rising

tendency in RCAI could be interpreted as real process of IS. The interpretation of a rising RCAI

values for selected four categories were different in the case of Afghanistan. Complementary

measures confirmed that the real IS has only taken place in two categories (fabrics-clothing-

footwear and clothing materials), while other two categories even with rising tendency of RCAI

cannot be interpreted as the case for IS.

Finally, the results obtained from the analysis of RCA index suggests that categories in which

Afghanistan has CA are low-skilled labor intensive sectors such as Agriculture, livestock, and

handmade industry, it signals that the source of CA laid on low-skill labor endowment. The result

was further confirmed by adverse argument that the lowered ranked categories were sectors

(capital or high-skilled labor intensive) with comparative dis-advantage such as manufacturing

products (light and heavy industrial products) .This theoretically valid and empirically observed

result can be further interpreted for those import categories (where IS took place) which are low-

skilled labor intensive products. It was proven that the IS has taken place in the right direction.

These mentioned products should defiantly be produced in a country like Afghanistan and it call

for initial support to grow in a safe atmosphere to be efficient and competitive in the future.

14

References

Central Statistics Organization of Afghanistan, 2012. Afghanistan Statistical Yearbook 2011-2012, Issue No.33, Kabul - CSO.

Central Statistics Organization of Afghanistan, 2012. Afghanistan Statistical Yearbooks 2002-2003 to 2011-12, Kabul - CSO.

Eltezam, Zabioullah, A., 1966. Afghanistan’s foreign trade, A Middle East Journal.

Gillis, M., Perkins, D. H., Roemer, M., & Snodgrass, D. R., 1992. Economics of development. Third edition, The Maple-Vail Book Group USA.

Habibullah, 2010. Competitiveness and comparative advantage of wheat production and effects of policy in Nangarhar province, Master thesis, WUR.Netherlands.

Kjeldsen-Kragh, S., 2001. International trade policy, Copenhagen Business School Press.

Krugman, P. R. & Obstfeld, Maurice, 2003. International Economics, theory and Policy, Sixth edition, Pearson Education USA.

Liang, H., 1993. A thesis on the rationales of import substitution industrialization strategy, Master's thesis, University of Denver).

Stutz, F. P., & de Souza, A. R., 1998. The world economy, third edition, Prentice Hall,

World Bank, 2004. Mining as a source of growth.

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Appendixes

Appendix 1. Import Categories

Machinery & equipment Construction materials Fabrics, clothing, & footwear Battery (vehicle) Cement Polyester fabric Battery (radio) Hard wood Men new cloth Tractor Women new cloth Water pump Paper Children new cloth Bicycle for children Cotton artificial Used cloth Lorry Cotton yarn Blanket and Wraparound Buss Flax yarn Men new footwear Passenger car Woolen yarn Women new footwear Motorcycle Other yarn Children new footwear Bicycle Rubber footwear Other vehicles Petroleum Generator Benzine (Petrol, Diesel,T one oil ) Millstone Kerosene Food items Motor oil Household needs & medicine Milk Powder Grease Toilet soap Wheat Other lubricant Washing soap Rice Washing powder Sugar Chemicals Sewing machine Other Confectionary products Chemical materials Washing machine Vegetable oil Painting (colors) Refrigerators Black tea Tire and tube for lorry Watch Green tea Tire and tube for car Clock Salt Tire and tube for bicycle Radio, Cassette player, Recorder Beef Cigarettes & drinks Television Chicken (meat) Cigarettes Matches Source: CSO, Statistical Yearbooks, 2002-2003 to 2011-12.

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Appendix 2.

Export Categories

Dried fruit Fresh Fruits seeds red raisin Grapes coriander seed green raisin pomegranate water melon seed black raisins apple alfalfa seed big raisins tangerine clover seed abjosh raisins melon Dried apricot. High quality water melon skin Dried apricot. Ashtaq apricot karakul skin damson plum sheep skin Dried apricot. Shakar para medical plants goat skin dried cherry licorice root cow and bull skin dried fig white asafoetida karnel of almond black asafoetida wool and cotton soft almond white behman sheep wool hard almond yarleng kurk wool kernel of walnut syoria cotton walnut anar dana pistachios kernel flower of zoof sausages kernel of apricot sheep sausage dried berry spices dried damson plum high quality caraway carpets & rug pine cone kajak caraway rug other dried fruit mushroom carpet, high quality carpet

Source: CSO, Statistical Yearbooks, 2002-2003 to 2011-12.