On October 5, 2016, the Government of Afghanistan presented the Afghanistan National Peace and Development Framework (ANDPF) in Brussels to representatives of the international community. The ANDPF is the country’s five-year plan for the years 2017 to 2021 and lays out the vision “to achieve self-reliance, increase the welfare of the Afghan people and build a broad-based economy that creates jobs.” Particular emphasis has been put on self-sufficiency, which is a highly laudable aim that represents a step change from the past. And indeed, the government has made great strides thus far: domestic revenue collection has increased by 15% in the year 2016, exceeding the budget target by around 5 percent, according to the World Bank. The same institution projects the economy to grow by 2.6 percent in 2017, a significantly higher rate than the 1.3 and 1.1 percent growth rates of the years 2014 and 2015, respectively.
So, is Afghanistan on track to meet its ambitious objectives? Unfortunately, the answer is no. With an average annual population growth rate of 3 percent and an estimated 400,000 Afghans entering the labor market each year, GDP growth remains significantly below the 8 percent required to fully employ Afghanistan’s growing labor force and increase revenue collection further.
SMEs are the engine of jobs growth and development
Industry experts, researchers and government officials increasingly highlight the role that small and medium enterprises (SMEs) play in creating employment and income. Because of their agile structure, SMEs quickly adapt to changes in economy, technology and consumer behavior. Hence, SMEs are the cornerstone in policymaking regarding youth employment and youth entrepreneurship.
According to the Central Statistics Office of Afghanistan, more than 98% of all firms in Afghanistan have less than 10 employees, a further 1.7% of all enterprises have 10-19 employees. Only 0.2% of all firms in Afghanistan have 20-49 employees and the remaining 0.1% have more than 50 employees.
SMEs are nimble and flexible, however, small and new ventures have several disadvantages and as a result cannot benefit from scale economies and face other impeding factors that are exacerbated in Afghanistan. These drawbacks can be considered the root cause for start-up failures. According to the OECD, most start-ups fail within the first five years, varying from 63% in the UK to about 47% in The Netherlands.
Given that start-up failure rates are generally at about 50%, a steady and ever increasing flow of new ventures is needed to increase the number of SMEs in Afghanistan. Unfortunately, new firm registrations have decreased in the past years and stand at more than 50% below their level recorded in 2012.
It is therefore of paramount importance to ensure a steady and increasing flow of new enterprise registrations. Unfortunately, new firm registrations in Afghanistan have continuously decreased in the past years and remain at more than 50% below their level recorded in 2012, illustrating the difficulty in launching new businesses in the country and highlighting a sluggish business sentiment.
A well-functioning entrepreneurship ecosystem can kick-start the economy
In order to promote viable businesses and support sustainable firm creation and youth entrepreneurship, Afghanistan needs to lay the foundation for a business conducive SME ecosystem and strengthen supporting institutions and organizations.
A more institutionalized approach to strengthening SMEs in Afghanistan will support firms in all life stages, increase firm survival rates and facilitate high-growth firms to prosper by meeting endogenous demand and growth opportunities.
Ecosystems are formed by people, enterprises and various types of organizations interacting as a system to facilitate education, training, know-how, networking and funding in all life stages of a firm. The entrepreneurship ecosystem impacts the ease and speed at which youth entrepreneurs and SMEs can establish new ventures and scale them into sustainable and competitive businesses.
The government as well as the private sector have pursued several initiatives to strengthen the environment for new and existing firms. However, more needs to be done for the nascent ecosystem to thrive.
In his landmark book, Startup Communities, Brad Feld posited that it takes about 15-20 years for a vibrant entrepreneurial ecosystem to develop in a city or region. Building on prior efforts, Lebanon, a post-conflict country that has emerged after years of civil war, implemented innovative and aggressive policies in the 2000s to spur the growth of their startup ecosystems and is now considered the most thriving startup hub in the Middle East, apart from Tel Aviv.
By leveraging best practices and avoiding common drawbacks in policy design, Afghanistan has a good chance to leapfrog neighboring countries and establish a thriving entrepreneurship ecosystem. Here are a few non-conclusive recommendations for laying the foundation for Afghanistan’s ecosystem:
Recommendation #1: Promote a culture for youth entrepreneurship
Few Afghans aspire to become an entrepreneur. When asked, most children and students want to become a doctor or an engineer, because they hold prestige and social acclaim. Entrepreneurs, however, receive little media attention. Therefore, a dedicated campaign with the aim to raise awareness and create excitement is needed by carrying out documentaries and interviews to celebrate successful youth entrepreneurs in Afghanistan.
The Afghanistan Business Summit (ABS) is an example of an annual gathering of Afghan entrepreneurs, celebrating successes and sharing insights, ideas and resources. But it’s a small drop in an ocean and so much more needs to be done to promote youth entrepreneurship.
Recommendation #2: Provide a single platform to conglomerate all available programs and information
Information on entrepreneurial programs and initiatives in Afghanistan is scattered and dependent on personal contacts and networks, inhibiting meritocracy and entrepreneurial drive. A single platform providing information and guidance on available grants, upcoming challenges and competitions, incubator/accelerator programs, technology parks and initiatives as well as venture capital and public funding programs would help divulge Afghanistan’s advantages for startups.
Recommendation #3: Set-up a one-stop shop for new ventures
Given the ever decreasing number of new firm registrations in Afghanistan, a dedicated push to incentivize new venture creation and youth entrepreneurship is much needed. A one-stop shop, offering a multitude of services, ranging from simplifying firm registration to providing one-to-one information on the myriad of funding and financing support programs could assist the would-be entrepreneur. Also, providing a temporary five-year tax holiday for newly registered firms will certainly create the much needed impetus for Afghanistan to spur new venture creation.
Recommendation #4: Adapt business, legal and regulatory requirements to meet the prerequisites of the international investment community
Afghanistan’s private sector needs to diversify funding sources and be less dependent on international donors. The growing impact investment community offers the opportunity to link Afghanistan to regional and global investors. Meeting the prerequisites of the international investment community will help infuse know-how, leverage networks and mitigate donor reliance.
However, international investors are used to international standards of deal-making and expect support when it comes to enforcing shareholders rights. The shareholder’s agreement is at the heart of any agreement amongst shareholders of a company and usually regulates ownership and voting rights, control and management of the company and makes provisions for the resolution of any future disputes between shareholders. Policy makers should provide a suitable and conducive legal framework to promote new investment and at the same time protect the rights of Afghan entrepreneurs.
Recommendation #5: Sharpen the investment acumen of youth entrepreneurs
There are already promising signs of international impact investment firms willing to invest in Afghan firms. In order to speed-up the deal-making process, Afghan entrepreneurs need to know the ins and outs of how to best engage with investors. Starting with the pitch and management presentation to the due diligence process and agreeing on the valuation of the company, there are many pitfalls to be considered. Investors have usually an edge when it comes to defining the highly-specific details in the shareholder’s agreement such as ‘pre-emption rights’ and ‘rights of first refusal’ or the so-called ‘tag-along and drag-along’ rights or anti-dilution provisions. Afghan entrepreneurs need guidance and advice from an independent and non-profit organization to avoid spending huge sums to legal advisors. This will enable youth entrepreneurs to sharpen their investment acumen and negotiate at a level playing field with their counterparts.
Afghanistan has to come a long way in developing its ecosystem for entrepreneurs and SMEs. Paramount to the success of the ecosystem is a well-formulated guiding strategy upon which all stakeholders can channel and coordinate policies, initiatives and programs. This requires analyzing the current business environment, setting a realistic vision for the ecosystem and prioritizing initiatives into a roadmap. The implementation of this roadmap hinges upon the collective effort by the Government of Afghanistan, the private sector as well as the international community. It is a daring endeavor, but also the surest way of delivering on the ANDPF’s promise to attain self-sufficiency for the Afghan economy.
This article was fist published on February 2018 as part of the first issue of BusinessDNA, Afghanistan’s first English executive business magazine.
 Source: The World Bank (May 2017), Afghanistan Poverty Status Update – Progress at Risk.
 Source: OECD (2015), Entrepreneurship at a Glance 2015, OECD Publishing, Paris
 Brad Feld, Startup Communities: Building an Entrepreneurial Ecosystem in Your City (Wiley, 2012).