ENVISIONING A POST-LEWISIAN MODEL OFINDUSTRIALIZATION: AFGHANISTAN’SMISSION IMPOSSIBLE

Serotonin

Dazzling headlights. A horn blast. The piercing squeal of brakes. A chaos of shattered glass and twisted metal – twinkling under the central Asian desert sun – that has once been the economic engine speeding up Afghanistan’s car of national development, now lies on the road, its wreck photographed by economists and politicians alike after the 2021 Taliban offensive, which effectively reinstated a repressive regime in Afghanistan.

Leading a nation is like driving a vehicle. For decades, totalitarian dictators commanding the economic engine have driven Afghanistan time and again into the muddy ditches of wars and off of the steep cliffs of liquidity crises. Most recently in 2021, when US troops withdrew from Afghanistan and when Taliban once again came to power, foreign donors severely cut support for Afghan development, ending the central Asian nation’s two years of continuous two digit GDP growth. The reduction in foreign aid and shrinkage of exports resulted in shortage of banknotes and a sweeping 25% contraction in the economy, with Afghanistan’s fragile yet huge service sector – constituting half of national GDP – shrinking 30% (Zazai, 2022). Unemployment rate rose to 40%, the entire financial sector collapsed, girls and women were blocked from jobs and education, and a staggering 69% of Afghans lost access to basic resources for mere survival (UNEP, 2024).

Afghanistan effectively returned to the preindustrial stage.

According to S.A. Lewis’s dual sector model, less developed economies exhibit the heterogenous coexistence of a traditional subsistence agricultural sector and a modern capitalist industrial sector.

Labor, population, and output in least developed states, like Afghanistan (fig. 1), tend to be centered around the former sector (World Bank Afghanistan Poverty and Equity team, 2022). Thus, driving a nation from a preindustrial to an industrial state means driving its labor, population, and productivity from the agricultural to the industrial sector, from rural lands to urban areas, from premodern customs to modern lifestyles. The result of this race towards modernization – what economists call “structural reorientation” – is an economy characterized by a single, homogenous sector.

In the last few centuries, Western states successfully modernized through this process. Today, this path is seen as the only road for Afghanistan and other developing countries to modernize (Li, 1991).

In an economy’s pre-industrial phase, the traditional agricultural sector is characterized by a large workforce, low productivity, and low wages; it is mainly located in the rural area. Because arable land is a fixed input, the abundance of labor and diminishing marginal return means that population growth – which occurs primarily in rural areas due to their larger population base – yields little to no marginal agricultural output. Because real wage (AKA per capita GDP) is the total product divided by the number of laborers (Fig. 2), population growth in less developed countries effectively reduces the average income in agricultural households – producing what’s called “surplus labor.” The comparatively higher average wage in the urban industrial sector – resulting from its comparative advantage in mechanized production, its relatively small existing labor force, and most importantly, rural agricultural sector’s lower average wage – thus drives farmers into the city. The comparative benefit mechanism fuels a nation’s growth from developing to developed stages and its structural reorientation from a heterogenous dual sector model to a homogenous mono sector landscape.

FIG 2. REAL WAGE AS THE RATIO OF TOTAL PRODUCT TO NUMBER OF LABORERS

Empirical evidence from recent decades, however, suggests that this one-step transition from dual to mono sector structure does not work in developing states. In Afghanistan, war, geographic barriers, and inadequate public projects significantly hindered communication and transportation, blocking surplus labor from migrating to seek urban job opportunities and even from accessing information about such opportunities in the first place (Jalil, 2023). More importantly, climatic disturbances, semi-arid weather, little physical capital accumulation, primitive agricultural productivity, and reliance on labor-intensive cash crops effectively concealed the existence of surplus labor, for it creates the perceived need for increased agricultural input – labor included.

But still more important is the fact that Lewis’s model fundamentally deviated from reality (Li, 1991). In reality, modernized urban industry’s capacity to attract and absorb excess labor is much weaker than Lewis expected. Due to the increase in capital concentration concurrent with modernization, the catch-up effect, and economies of scale, the growth rate of employment in urban industry is much lower than the growth rate of productivity. The income level of traditional sectors is often as low as the minimum living cost in rural areas, but since cities – compared to agricultural rural communities – are not subject to the limitation imposed by land as a fixed input, there are still a large number of rural laborers entering this traditional urban sector. Empirical studies in the 1980s and 90s conducted in Latin American and Asian developing countries verified that traditional urban economic activities – instead of modern industry – have absorbed much of the outflow of rural labor (Li, 1991). This concentration of population in traditional urban sectors formed the urban poor. Large-scale rural to urban migration fundamentally hinders transition to a homogenous urban industrial economy. The Lewis model of development is, both practically and theoretically, not feasible in Afghanistan.

For Afghanistan to modernize, then, it must first raise its agricultural productivity to free up its surplus labor. This surplus labor must then be transported to the industrial sector and not traditional nonindustrial sectors – when adequate transportation networks are nonexistent and urban industrial employment opportunities are slow to expand. Without any bridge, Afghanistan has to drive through the rift valley separating rural agriculture from urban industry.

This is Afghanistan’s mission impossible.

Only that it is possible – if we look away from Lewis’s theory of a one-step transition, and towards the possibility of constructing a transitional sector bridging the gap between rural traditional agriculture and urban modern industry, so that the car of Afghanistan’s development can drive through. Li (1991) studied precisely this third bridge: a rural industrial, semi-modern economic sector.

This rural industrial sector derives resources from rural areas. This means that it is located in proximity with its factors of production, and can absorb excess agricultural labor with minimal transportation and transaction costs. Its production model is copied from urban industries (though it’s often less efficient, and takes up farmland), while its focus tends to be oriented around light industry. Given a freemarket economy with minimal government restrictions/regulations, the development of such a rural industrial economic sector is the natural and inevitable result of surplus labor trapped within rural areas by geographic barriers.

Aside from a market free of intervention, Afghanistan has precisely all those factors in place.

With strong forward and backward linkages, the rural industrial sector would be a great dririver of industrialization. In terms of backward linkage, rural processing industries, with agricultural products as raw materials, raise demand for the agricultural sector. As to forward linkage, they manufacture tools and goods close to, and useful in, rural markets, fostering greater agricultural productivity. Because rural industries are located near rural agriculture (e.g. both in the countryside), they are closely connected. The same relation exists between rural and urban industrial sectors. Rural industries provide raw materials and semi-finished products for the urban industrial sector, while outdated machinery in the urban industrial sector is sold as physical capital to the rural industrial sector. Because rural industries share production models with urban industries, they too are closely connected. Thus, the rural industrial sector can effectively connect the rural agricultural and the urban industrial sectors, bridging the gap in the dualsector model.

The engine of the Afghan economy is ready. A new bridge can be constructed – in the name of the “rural industrial sector.”

References:

Afghanistan: Economy. GlobalEDGE: Your source for Global Business Knowledge. (n.d.). https://globaledge.msu.edu/countries/afghanis tan/economy#source_1

Jalil, H. (2023). The Taliban and the RuralUrban Divide. Afghanistan Research Network.

Li, K. (1991). 论我国经济的三元结构 | On the Ternary Structure of Chinese Economy. 中国社 会科学 | Social Sciences in China, (3), 65–82.

United Nations. (2024, March 7). Afghanistan’s economy has “basically collapsed”: UNDP | UN news. United Nations. https://news.un.org/en/story/2024/03/1147387

World Bank Afghanistan Poverty and Equity team. (2022). Afghanistan Welfare Monitoring Survey. World Bank Group.

Zazai, N. (2022, November 9). Newly-printed Afghani banknotes reach Kabul. Pajhwok Afghan News. https://pajhwok.com/2022/11/09/newlyprinted-afghani-banknotes-reach-kabul/