Outlook for 2011-12

The legitimacy of the government led by the president, Hamid Karzai, will remain compromised by the tarnished electoral process and the circumstances surrounding Mr Karzai's re-election in 2009. The president will be even weaker in his second term than during his first, and will be more reliant on the warlords and strongmen to whom he owes political favours. The parliamentary election of September 2010 should, in theory, have bolstered Afghanistan's democratic credentials, but the allegations of electoral fraud and the fact that the outcome of the poll is still being contested indicates that political stability will remain elusive and, if anything, has worsened in recent months. The security outlook is highly unsettled, and attacks by elements linked to the Taliban will remain at a high level. Despite improvements in tax collection, Afghanistan will remain dependent on donors. Relations with Pakistan and Iran will be volatile. Instability in Pakistan will present security and trade risks for Afghanistan. Growth in construction will help to drive economic expansion in fiscal year 2010/11 (March 21st-March 20th) and 2011/12, while output growth in the crucial agricultural sector will decelerate following the strong expansion recorded in 2009/10.

The political scene

The results of the parliamentary election that was held in September 2010 were finally announced in early December. Allegations of electoral fraud are widespread, and there have been calls to void the result. Discussions among the nations making major troop contributions to the International Security Assistance Force (ISAF) in Afghanistan have in recent months centred on setting the dates for the withdrawal of troops. Proposed peace talks between the government and the Taliban appear to have stalled.

Economic policy

On October 29th the governments of Pakistan and Afghanistan signed another element of the transit trade agreement, extending the agreement signed in July 2010. On December 11th a framework agreement was signed by the presidents of Turkmenistan, Afghanistan and Pakistan, as well as India's energy minister in Ashgabat, the capital of Turkmenistan, for the TAPI natural gas pipeline.

The domestic economy

The relatively stable northern city of Mazar-i-Sharif is experiencing an economic boom as investors look for opportunities in Afghanistan and turn away from the more volatile south of the country.

Foreign trade and payments

Afghanistan plans to export raisins to the UK. On November 30th the UAE hosted the first Afghanistan International Investment Conference in Dubai.

Land area

652,100 sq km (World Bank, World Development Indicators Database)

Population

25.5m in mid-2009 (Asian Development Bank, Key Indicators of Developing Asia and Pacific Countries)

Main towns

Kabul: 2,536,300 (Central Statistics Office, 2006)

Kandahar: 450,300 (Central Statistics Office, 2006)

Heart: 349,000 (Central Statistics Office, 2006)

Climate

Continental (wide extremes of temperature)

Weather in Kabul (altitude 1,815 metres)

Hottest month, July, 16-33°C (average daily minimum and maximum); coldest month, January, minus 8-2°C; driest month, September, 1 mm average monthly rainfall; wettest month, April, 102 mm average rainfall

Main languages

Pashtu and Dari (Persian)

Measures

Metric system. Local measures include:

1 gazi jerib = 0.7366 metres

1 jerib = 0.195 ha

1 charak = 1.7665 kg

1 seer = 9.066 kg

Currency

The afghani (Af). Average exchange rate in 2009: Af50.2:US$1

Time

4.5 hours ahead of GMT

Fiscal year

March 21st-March 20th

Public holidays 2011

February 15th (Liberation Day; also Roze-Maulud, Birth of the Prophet Mohammed); March 21st (Navruz, New Year's Day, Iranian calendar); April 18th (Liberation Day); April 28th (Victory Day); May 1st (Labour Day); August 19th (National Day); August 30th (Eid al-Fitr, end of Ramadan); November 6th (Eid al-Adha, Feast of Sacrifice); December 5th (Ashura)

Official name

Islamic Republic of Afghanistan

Form of state

Islamic republic

The executive

The president is both head of state and head of the government. The cabinet is appointed by the president and approved by the lower house of parliament

National legislature

The electoral law passed in 2004 provides for a National Assembly comprising a 249-seat lower house, the Wolesi Jirga, and a 102-seat upper house, the Mushrano Jirga

National elections

Hamid Karzai began a second five-year term as president in November 2009 after a disputed election held in August of that year. Elections for the lower house and provincial councils were held in 2005; candidates stood as individuals rather than as representatives of parties. A lower house election was held on September 18th 2010; the next presidential election will be held in 2014, and the next legislative and provincial council elections are due in 2015

National government

The president appoints the government, which reflects Afghanistan's ethnic mix

Main political organisations

A number of factions exist (some dating from the war against the Soviet Union in the 1980s), including the Taliban (Sunni Pashtun); the Northern Alliance, primarily consisting of Jamiat-i-Islami (Tajik), Hezb-i-Wahdat (Shia Hazara), Junbish-i-Milli (Uzbek) and the National Islamic Front; and Hezb-i-Islami (Pashtun)

President: Hamid Karzai

First vice-president: Mohammad Qasim Fahim

Second vice-president: Mohammad Karim Khalili

Senior minister in the cabinet: Hedayat Amin Arsala

Key ministers

Agriculture: Mohammad Asef Rahimi

Borders & tribal affairs: Arsala Jamal

Commerce & Industries: Ghulam Mohammad Aylaqi

Counter-narcotics: Zarar Ahmad Muqbel

Defence: Abdul Rahim Wardak

Economy: Abdul Hadi Arghandiwal

Education: Ghulam Farooq Wardag

Finance: Omar Zakhilwal

Foreign affairs: Zalmay Rasul

Information & culture: Sayed Makhdum Rahin

Interior: Mohammad Hanif Atmar

Islamic affairs: Mohammad Yasouf Neyazi

Justice: Habibullah Ghaleb

Mines: Waheedullah Sharani

Public health: Suraiya Dalil

Returnees & refugees: Abdul Rahim

Rural development & rehabilitation: Janullah Mansouri

Telecommunications & information technology: Abdul Qadus Hamidi

Transport: Abdul Rahim Horas

Urban development: Sultan Hussain Nasery

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Despite numerous moves by the president, Hamid Karzai, to strengthen his political authority (for example, a presidential decree issued in February 2010 gave Mr Karzai the authority to appoint all five members of the Electoral Complaints Commission), the controversy surrounding the 2009 presidential election weakened his position significantly. The parliamentary election in September 2010 should, in theory, have bolstered Afghanistan's democratic credentials, but the allegations of electoral fraud and the fact that the outcome of the poll is still being contested indicates that political stability will remain elusive and, if anything, has worsened in recent months. In 2011-12 Mr Karzai will be even more tightly constrained than he was in his first term by the need to juggle the interests of the powerful figures who backed his re-election, as he is believed to have offered political favours to a wide range of people in return for their support. His supporters performed poorly in the 2010 parliamentary poll, so in light of the alleged level of fraud, Afghanistan's fragile electoral bodies may come under pressure to void all or part of the result. If, however, the results stand, Mr Karzai will be even weaker in 2011-12 than previously expected. Jostling for position will continue among the major political backers of the administration. Ethnic tensions will continue to simmer, and the security situation will remain volatile.

Tensions persist regarding the potential impact of the programme to reintegrate insurgents into civilian life, which was approved at the Kabul Conference in July 2010. (The conference was attended by representatives from 70 countries and multilateral organisations for the purpose of approving the next stage in Afghanistan's reconstruction.) Some development organisations have raised concerns that the use of development incentives in the programme could harm their ability to work in local communities. Human rights organisations have highlighted the potential risks to women if insurgent groups are reintegrated into mainstream society and politics. Moreover, some Afghan political leaders have stated that they are uneasy about the plan to work with the Taliban (the fundamentalist movement that ruled most of Afghanistan for several years between 1995 and 2001), as this would change the balance of power in the central government. This alliance would likely increase the power of the predominantly Pashtun Taliban and reduce the influence of Tajik, Uzbek and Hazara political leaders.

One of Mr Karzai's top priorities in the next two years will be the ongoing struggle against the Taliban insurgency. A peace jirga (tribal council) organised by the president in June put forward a number of proposals to help these efforts, including reviewing the names on the UN Security Council watch list of Afghan terrorist suspects and initiating a prisoner-release scheme. However, the meeting has not proved to be a major turning point, at least as far as negotiations with the Taliban are concerned. Although local Taliban cells can sometimes be persuaded to enter into reconciliation discussions, the most important Taliban leaders have refused to talk to the government until certain demands are met.

Assassinations and attempted murders of political leaders by the Taliban and other groups are likely to continue. Further dramatic incidents, including bombings, are possible as the Taliban seek to undermine the government's claim to be in control. The insurgents may be particularly keen to stage incidents in order to portray as a failure the campaign launched by the International Security Assistance Force (ISAF) and Afghan forces in February to take control of several Taliban strongholds in Helmand province, in south-western Afghanistan. The same will apply to the ongoing ISAF-led effort to regain control in neighbouring Kandahar province, which recommenced in September 2010 after having been suspended for several months. Foreigners will face an exceptionally high level of security risk throughout the country. On balance, the security outlook will continue to be highly unsettled. The incidence of violent attacks by elements linked to the Taliban will remain high in 2011-12.

Concern is likely to grow regarding the influence of conservative Islamic groups, notably in terms of their treatment of women. Such concerns are unlikely to disappear, despite Mr Karzai's efforts to include more women in the cabinet and parliament. Parliament continues to pass laws that lean closer to Islamic fundamentalist principles than to Western concepts of human rights. The potential for ethnic and sectarian violence is another major political concern, as is the narcotics trade: Afghanistan produces more than 90% of the world's heroin, and cannabis production is also rising. Strong economic growth will not remove the sources of political discontent, but the government's reputation is likely to rest on its success in tackling the issues that are of greatest concern to the population, such as unemployment, inflation and power shortages.

The next presidential election will be held in 2014, and the next legislative and provincial council elections are due in 2015. A parliamentary election was held in September 2010, and the results were announced in early December, after a two-month delay. Allegations of electoral fraud have been widespread, and some officials-particularly among the ethnic Pashtun community, which comprises around one-half of the population of Afghanistan but whose candidates fared poorly in the poll-have called for the result to be annulled. On the one hand, the results indicated that Mr Karzai was unable to influence the outcome sufficiently to ensure a more biddable legislature. On the other hand, the controversy surrounding the poll means that a new parliament has been unable to form. This is meant to happen by January 20th, but in early January the government ordered the establishment of a special judicial panel to deal with the election complaints. The court is supposed to issue a ruling within two weeks, but the time frame suggests that the January 20th deadline for convening a new parliament is unlikely to be met. Moreover, complaints that the formation of the panel was itself unconstitutional mean that the political crisis is likely to drag on for even longer.

Afghanistan's most important international relationships remain those with the US and the other NATO states that are participants in ISAF. Ties between Mr Karzai's government and its NATO backers will remain volatile. Relations have been strained owing to the president's failure to tackle well-connected drug-traffickers (many of whom are close to his administration), his moves to assert his independence from his foreign supporters, and concerns about the 2009 presidential election (and now, about the 2010 parliamentary election as well). Continuing allegations of large-scale corruption within the government have further strained ties with the US. However, Mr Karzai has provided some sops to foreign pressure, for example by promoting more women in politics.

Most ISAF countries show no sign of wishing to disengage from Afghanistan immediately, but several have announced near-term deadlines for the withdrawal or transition to non-combat roles of their forces. Even the US's long-awaited announcement of a "surge" of additional troops in Afghanistan was accompanied by a pledge to begin a partial withdrawal of troops in July 2011 (albeit subject to numerous conditions). This contradictory approach reflects the fundamentally impossible task facing the US president, Barack Obama, who must try to reassure Afghans that the US does not intend to "cut and run", ultimately leaving the country to the Taliban, while at the same time reassuring his domestic constituency that he is not pledging an open-ended commitment.

Relations with Pakistan will continue to be vital in a number of areas, including trade and security. However, the Pakistani government's capacity to enforce its rule in tribal areas bordering Afghanistan remains extremely limited. Given the volatility of politics in Pakistan (and the outbreak of a new domestic political crisis in January this year), the fact that its government will remain preoccupied with dealing with the aftermath of catastrophic flooding, and the problematic security situation in the border region, there is a risk that the area could become even more unstable. The multitude of domestic problems means that Pakistan is unlikely to devote much attention to improving ties with Afghanistan, at least in the early part of the forecast period.

Ties with Iran, which have been warm since 2001 owing to Iran's historical support for opponents of the Taliban, will be more nuanced in 2011-12. There have been concerns that Iranian weapons are finding their way to insurgents in Afghanistan, and Iran has stepped up efforts to repatriate Afghans living on its territory. However, Afghanistan's trade ties with Iran are improving, reducing the landlocked country's reliance on Pakistan for routes to the sea.

Both the Afghan government and the international donors and agencies that provide it with financial and security support will focus on economic development in 2011-12. Recent meetings between Afghanistan and its donors have emphasised the provision of basic services, such as electricity and education. There is likely to be a growing emphasis on the need to move Afghanistan's public finances on to a more sustainable long-term path. The government continues to make slow but measurable progress in the area of economic reform. Land registration-a major impediment to business, owing to delays and competing claims-and privatisation efforts are also likely to see only slow progress. The IMF will continue to provide support for policies aimed at containing non-security recurrent spending.

According to the latest IMF estimates, domestic revenue collection as a proportion of GDP reached 9% in fiscal year 2009/10 (March 21st-March 20th), up from an average of 7.1% of GDP in 2006/07-2008/09. The rise has been aided partly by the improved ability of the customs agency to charge tax on fuel imports, and by amendments to the income tax law. A further boost was provided by the introduction of a business tax on imports before the start of 2009/10. Tax revenue collection continued to rise in the first four months of 2010/11, according to government estimates. Afghanistan's tax revenue could increase by as much as 25% by the end of 2010/11. Despite these recent improvements, increasing revenue remains an urgent priority, given that donors are likely to wind down budgetary support in the coming years. Afghanistan will continue to have one of the world's lowest ratios of fiscal revenue to GDP in the forecast period. The government will also want to address its failure to spend its development budget: at present, many ministries lack the capacity to plan and implement development programmes.

The authorities will have only limited influence over monetary policy in 2010-11, owing to the undeveloped nature of the country's financial system. Da Afghanistan Bank (the central bank) will continue to undergo reform in the next few years as it withdraws from commercial banking, its takeover of Kabul Bank in September 2010 notwithstanding.

According to the IMF, real GDP growth (excluding opium production) is estimated at around 22.5% in 2009/10, driven largely by the performance of the agricultural sector and increased spending by the government and donors. This compares with a real GDP growth rate of just 3.4% in 2008/09, when economic output was curtailed by drought, which depressed agricultural growth. During 2010/11-2011/12 the economy's expansion will be supported by strong investment in construction (much of which will be linked to donor-led development projects) and by private consumption.

Industrial growth may also be boosted by improved electricity supplies during the forecast period. A transmission link to Uzbekistan has boosted power supplies in the Afghan capital, Kabul, and the rehabilitation of hydroelectric projects at Mahipar and Kajaki will provide further support to generating capacity, provided that rainfall is adequate.

Weather factors will play the largest role in determining the level of agricultural production, but harvests in 2011 are expected to be good. Cultivation of poppies for heroin and opium production is the largest industry in Afghanistan, although it remains illegal. Foreign agencies have led a campaign against poppy cultivation, but campaigns against poppy-growing will play a less significant role than prices in determining the mix of crops.

The rate of inflation peaked at 43% year on year in May 2008, according to IMF data, stoked by surging global food and fuel prices. Good domestic harvests caused prices to drop rapidly in 2009, but inflation picked up steadily in 2010. Price levels began to rise again in June 2010 after 14 consecutive months of year-on-year falls. Consumer price inflation rose to 7.5% year on year in October 2010 from 5.3% in September and -14.1% in October 2009. The rate of inflation is likely to remain above 5% in the medium term, owing to rapid economic growth and supply constraints.

Estimates by the IMF suggest that Afghanistan ran a merchandise trade deficit of roughly US$6.3bn in 2009/10, but the trade gap should narrow in the next two years as goods imports slow. (Including grants, the current account will remain close to balance.) The composition of imports will become increasingly dominated by capital goods, many of which will be linked to the development of the Aynak copper deposit, where mining operations are expected to start within the next decade. Substantially higher exports of minerals are therefore possible, but will take many years to be realised. Donor-funded infrastructure projects will also boost imports. The potential for an increase in Afghanistan's traditional exports, such as carpets and dried fruit, is limited, but greater transit trade from Central Asian countries and trade with Iran could provide a boost.

The results of the parliamentary election that was held in September 2010 were finally announced in early December, after a two-month delay caused by a farcical process of claim and counter-claim regarding electoral fraud. Hundreds of the 2,500 candidates were directly accused of fraud. In addition, 1,100 temporary staff of the Independent Election Commission (IEC, a constitutionally sanctioned body) were referred to the Electoral Complaints Commission (ECC) on suspicion of fraud.

More than 440 polling centres' votes were declared invalid at the beginning of October, but the vote-counting process was far from smooth and on November 11th it was announced that the IEC had found ballots in a warehouse from 511 polling centres across 20 provinces that had still not been counted nearly two months after the election had taken place. Election officials said that the additional votes would be counted, but that they would not affect the results.

In Khost province alone there were 206 written complaints, of which only six were deemed not to have the potential to affect materially the outcome of the election. The provincial election official, Shahzada Hassan, was detained by police and accused of attempting to sell positions to candidates in the provincial electoral body.

Overall there were about 6,000 complaints, of which 2,200 were deemed to have the potential to affect the results. Officials believe that more than 400 candidates may have been involved in improper conduct, and that about one-quarter of the votes were excluded from the final results. During the vote-counting period it was alleged that Ismail Khan, the former governor of Herat province, pressured the election bodies to favour his candidates in Herat. Mr Khan was recorded, for example, telling an election official that "I hope that the next results you announce will be all the people that I have named for you".

Just before the announcement of the election results, the attorney-general, Abdul Jabar Sabet, suspended the spokespersons for the ECC and IEC on corruption charges. Mr Sabet's office has sought to arrest several election officials on allegations of fraud, including one individual who was believed to work at a UN mission in Afghanistan.

On the eve of the announcement of the results, the IEC announced that it was disqualifying 24 winning candidates on evidence of electoral tampering and fraud. This represents nearly 10% of all the 249 seats in the lower house of parliament. Among the disqualified candidates were individuals such as Mir Wali from Gereshk, in Helmand province, who is believed to be linked to an armed group operating in the area.

Overall, the number of supporters of the president, Hamid Karzai, has declined. Mr Karzai is expected to be able to count on the support of only around 100 members of parliament. Meanwhile, ethnic Pashtun voters in some provinces, such as Ghazni, failed to elect a single Pashtun leader, giving all 11 seats in Ghazni to Hazaras, who are an ethnic minority in that province. Overall, according to the results announced by the IEC, Pashtuns lost at least 25 seats, so they will therefore hold only around 94 seats in the lower house. Since Pashtuns form nearly one-half of the Afghan population, they will be severely under-represented in the new parliament.

On January 3rd, however, the government ordered the Supreme Court to establish a panel comprising five judges. The panel is meant to issue a ruling by mid-January on the allegations of electoral fraud, but the panel has been condemned by the IEC and the ECC as unconstitutional. The panel's opponents assert that its creation was politically motivated. A new parliament is meant to be convened by January 20th.

Discussions among the nations making major troop contributions to the International Security Assistance Force (ISAF) in Afghanistan have in recent months centred on setting the dates for the withdrawal of troops. After the Lisbon conference on November 19th-20th, it was clear that the original July 2011 deadline for starting to withdraw troops had been softened. Some analysts had criticised that date, saying that it was heightening short-termism among Afghan security forces and handing the Taliban a date for which they could hold out hope of "victory".

The transition debate has now settled on a phased reallocation of military resources away from areas that are deemed secure enough, and well governed enough, for troops to move in to support roles or leave the areas altogether. However, the troops will not necessarily withdraw from the country. Instead, districts and provinces will have increasingly fewer military personnel-although civilian deployments may be extended-or military roles may focus more on training and less on combat. Instead of combat operations ceasing in 2011, as was originally planned, they will now cease in 2014, and only then if conditions on the ground are sufficiently stable. Mark Sedwill, NATO's senior civilian representative, has warned that some areas may not be "transitioned" until 2015.

Transition plans may, however, be hampered by high attrition rates among the Afghan National Security Forces and gaps in leadership. By early November 2010 the Afghan National Army had grown to 138,164, from 97,011 a year earlier, and the Afghan National Police force numbered 120,504, up from 84,958 a year earlier. The training of the first 33,000 police officers took seven years; in contrast, over the last year 35,000 officers have been trained. However, David Petraeus, the ISAF commander, is still calling for 800-900 more trainers to be sent to work on specialised issues such as logistics, intelligence and medical support.

The administration of Mr Karzai seems to be sending mixed messages about how seriously it wants to negotiate with the Taliban. A flurry of media reports in October 2010 suggested that the Taliban were ready for talks with the government, and that ongoing contact between the two sides was progressing. By the end of October, however, it seemed that the process-or perhaps more accurately, the preliminary process-had stalled because of an unwillingness on the part of the US and Afghan governments to engage seriously in talks; minimum guarantees for negotiations that were demanded by the Taliban were not met. The government of Saudi Arabia, which has often acted as a neutral mediator, also backed away from the talks, saying that the Taliban must distance itself further from al-Qaida.

Aside from international efforts to broker some form of a peace settlement, the Afghan government has established the High Peace Council as part of the Afghanistan Peace and Reintegration Programme (APRP). The composition of this 70-member body has been highly criticised for not having any significant Taliban representation, and for being yet another warlord-run council led by former mujahideen leaders such as Ustad Rabbani and Sibghatullah Mojaddedi. Therefore, there are few hopes that the new body will act as a faithful agent in a peace process.

However, the inauguration of the High Peace Council has led to increased efforts to reintegrate insurgent fighters with the national security forces. Small groups of insurgent fighters from a range of backgrounds and affiliations, including from the Taliban, Hezb-i-Islami and other non-affiliated armed groups, have registered for the APRP. In particular, over 100 men laid down their weapons in the northern provinces of Kunduz, Takhar and Baghlan, as did hundreds of insurgents in Badghis and Heart provinces. Nonetheless, the Taliban have also been active in countering the reintegration programme. Along with threatening participants, they have encouraged entire Afghan National Police units to defect.

Insurgent attacks have continued across much of Afghanistan, despite the onset of winter, which is normally associated with a lower tempo in the conflict. In particular, there have been several significant attacks against fixed ISAF positions at bases and airports by large groups of insurgents. On October 30th 80 insurgents were killed during an attack on a NATO base in Paktia province. The district centre of Khogyani, in Ghazni province, was overrun on October 31st amid increasing violence in the province, and the Taliban claimed that 14 of their members attacked Jalalabad airport on November 13th, leading to at least six deaths among the attackers.

Afghan government officials and local elders who do not support the insurgency in the south of the country are being targeted regularly by a Taliban assassination campaign. On September 26th the deputy governor of Ghazni province, Mohammad Kazim Allahyar, was killed, reportedly by the Taliban. On October 20th the governor of Kunduz province, Mohammad Omar, was killed along with 20 civilians at a mosque in neighbouring Takhar province. In Kandahar, the Taliban have stepped up their assassination campaign, killing hundreds of people in the past few months.

There have also been a number of kidnappings of foreigners working for private development companies, such as Development Alternatives Inc (DAI), as well as non-governmental organisations (NGOs). Linda Norgrove, who worked for DAI, was kidnapped in Kunar province in late September 2010 but was killed by her would-be liberators during a Special Forces raid on October 8th. A Dutch national was kidnapped in Kunduz province on October 25th, but the NGO worker was later freed.

Eastern Afghanistan has also been subject to some significant attacks; a police training centre, an airstrip in Shindand and the UN's offices in Herat were all attacked in late October. On October 16th, a week before the attack on the UN compound, the Italian defence minister, Ignazio La Russa, said that the Herat zone could already be ready for handover. This echoed comments made by French, German and British military officials that parts of their areas of responsibility could be transitioned in spite of ongoing violence.

Civilian casualties continue to mount across the country; in the six months to October, 1,119 civilians were killed and a further 2,473 injured according to figures from the Ministry of Interior. About 100 Afghan police are killed every month; over the same six-month period, 595 police officers were killed and 1,345 injured. In October alone 229 civilians were killed, and 313 wounded. During the same six-month period 587 Taliban militants were killed and 445 arrested.

As demonstrated by the recent parliamentary election, international efforts to support anti-corruption activities in Afghanistan have faltered. The revelation that Mr Karzai admitted to receiving cash from the Iranian government has further dented his image abroad. It has also heightened concerns that Iran is attempting to buy influence in Afghanistan; allegations that surfaced after the story broke included an assertion that Mr Karzai's spokesman, Mohammad Umer Daudzai, had specifically been given money to buy his loyalty. Mr Daudzai was Afghanistan's ambassador to Iran 2005-07 and is believed to have come under Iranian influence. He is also a member of the political wing of Hezb-i-Islami, which is an offshoot of the militant group, Hezb-i-Islami Gulbuddin (HiG), run by Gulbuddin Hekmetyar. The story first broke in the Afghan media a year earlier, but had not been picked up by foreign outlets. Mr Karzai's representatives attempted to defend the payments, saying the government is accountable to Iran for the way that it spends the money.

US efforts to tackle corruption seem to be failing. Investigations into alleged tax evasion by Mr Karzai's brother, Mahmood Karzai, have commenced, but other anti-corruption initiatives have been sidelined. The two foreign-backed Afghan task forces that are supposed to be dealing with high-level corruption have been unable to move from investigations to prosecutions. Moreover, the president's intervention to release one of his aides from prison in August, after the aide was arrested on corruption charges, has blunted the impact of their work. The case was further complicated by the fact that the aide in question was on the payroll of the US Central Intelligence Agency (CIA); some observers have therefore speculated that others who are on the CIA's payroll may believe they are immune from prosecution for corruption.

Meanwhile, Afghan government officials from the High Office of Oversight and Anti-corruption claimed on December 7th that 80% of corruption in Afghanistan involves foreigners. This angry riposte came after General Petraeus claimed that corruption was part of Afghanistan's history and culture.

The Economist Intelligence Unit's 2010 democracy index ranks Afghanistan 150th out of 167 countries rated (down from 138th in the 2008 index). It is thus classified as an "authoritarian" regime, despite having recently conducted democratic (but flawed) elections for both the presidency and legislature (as well as a number of regional bodies). Afghanistan's very low overall score reflects the fact that, despite almost a decade of strong donor support, including financial, military and governance assistance, its government remains extremely weak-which is reflected in an abysmal score for functioning of government of just 0.79 out of 10. The central government's writ is applied only weakly in much of Afghanistan, with powerful local individuals having much greater influence in many areas. In parts of the country security is so fragile that central government influence is hard to detect at all. Particular concern surrounds issues such as tax collection and the enforcement of law (including the eradication of opium poppy cultivation). Disarmament of militias, or their incorporation into national security bodies, remains incomplete. Corruption and misadministration are widespread and extremely serious problems.

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Electoral processes are severely flawed

Given Afghanistan's recent history, the fact that elections have taken place at all is, in a sense, a positive thing. However, the most recent polls have shown the electoral process to be severely flawed, resulting in the country's score for electoral process falling sharply to 2.50 in the 2010 index, compared with 5.17 in the 2008 index. This was the primary driver of the decline in Afghanistan's overall score (to 2.48, from 3.02 in 2008) and global rank. The 2009 presidential election offered voters a range of choices, but was seriously marred by corruption, vote-rigging and violence on polling day. Around one-third of the ballots in the 2009 presidential election were declared invalid because they were deemed fraudulent. The main challenger to the incumbent, Hamid Karzai, withdrew from the run-off election, leaving Mr Karzai to be declared president by default. Allegations of fraud also tainted provincial council elections in 2009, as well as the parliamentary election in September 2010. The controversy around this last poll rages on, and has prevented a new parliament from being convened.

Civil liberties are better than might be expected

For such a poor country Afghanistan's civil liberties score is relatively good. This is partly the result of strong support for civil liberties among Afghanistan's donors and military backers-a position reflected in the country's new constitution. However, conservative Islamic forces have challenged the current line on civil rights in many areas, such as women's rights. In addition, a combination of intimidation (often violent), weak electoral administration skills, poor education and cultural factors mean that the electoral system does not function freely and fairly. Insurgents also target those associated with the government for assassination in much of the country, especially in the south, deterring participation and freedom of expression. Afghans are in any case growing more disillusioned with their government, after its failure to deliver on early overoptimistic promises of rapid improvements in security and development. Afghanistan's political culture and political participation scores are thus low.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indexes.

The category indexes are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

On October 29th 2010 the governments of Pakistan and Afghanistan signed another element of the transit trade agreement, extending the agreement signed in July. The July agreement allowed Afghan and Pakistani vehicles to transport goods within each other's borders. The new agreement allows Afghan vehicles access to Pakistan's border with India at Wagah; from there, Afghan goods can be transported to India on Indian vehicles. In return, Pakistan will gain access to the central Asian states through Afghanistan.

The agreement does not give India access to Afghanistan via land through Pakistan; this will continue under existing agreements through Pakistani sea ports. During the visit of Pakistan's president, Yusuf Raza Gilani, to Kabul, the Afghan capital, in early December, the two countries pledged to implement fully the Afghanistan-Pakistan transit trade agreement. The two countries hope to increase bilateral trade from US$2bn a year currently to US$5bn a year by 2015.

On December 11th a framework agreement was signed by the presidents of Turkmenistan, Afghanistan and Pakistan, as well as India's energy minister in Ashgabat, the capital of Turkmenistan, for the TAPI natural gas pipeline, which would run from Turkmenistan to India with a total length of 1,700 km. It is only a framework agreement, and details about security and funding for the pipeline have not yet been finalised. The pipeline would run through parts of Afghanistan where security is still very poor; the project will therefore face significant obstacles in implementation. The project was costed at around US$3.3bn, but some estimates suggest that the final cost could be as high as US$10bn. The project is supported by the Asian Development Bank, although the US also supports TAPI as a counterweight to another proposed pipeline between Iran, Pakistan and India. (The US opposes the latter proposal on political grounds.)

The minister of mines, Wahiddulah Sharani, has been talking up the prospects for Afghanistan's mining sector. Over the course of the next 12 months the Afghan government will open tendering processes for a gold mine and for oilfields in Kashbasi and Mazar-i-Sharif. It is also continuing exploration of the Balkhab copper deposit. There has already been some interest from foreign mining companies, for example, US-based Newmont Mining. However, it is unclear how and when these potential opportunities will actually materialise, given the long and tortuous bidding process for the Hajigak iron ore mine. Bids were originally accepted until February 2010, but the bidding process was reopened in late September after Mr Shahrani was appointed minister of mines; his predecessor had left the post amid allegations of corruption. The mine could provide US$300m annually in tax revenue for the Afghan government, and US$1.5bn in indirect income. The contract is expected to be awarded at the end of 2011.

In addition to the tender notices, the government has outlined plans for the expansion of rail networks from Kandahar to Chaman in Pakistan and from Pakistan through Mazar-i-Sharif to Turkmenistan. However, these have not yet been tendered and it will be years before they are completed. Mr Shahrani is also concerned about the perception that the practice of awarding contracts is rife with corruption; he says he is shaking up the Ministry of Mines and has created its first business plan.

A diplomatic row started after it emerged that Russian agents had been present at an Afghan-led drug raid in eastern Afghanistan. On October 26th the Afghan president, Hamid Karzai, released a statement asserting that the presence of the Russian agents was "a blatant violation of Afghanistan's sovereignty and of international laws". This was after the Ministry of Counter-narcotics had held a press conference showcasing the success of the raid, which led to four opium laboratories and over 1 tonne of heroin being destroyed. It is not clear whether the Russian presence included civilian agents or military personnel, nor whether they took an active part in the raid. Several Afghan senators called for an investigation into the incident and criticised the government for not co-ordinating effectively regarding the presence of Russian agents. However, Russia's anti-drug organisation, the Federal Drug Control Service, has argued that the raid and the presence of Russian forces had been cleared by the Afghan government.

The Ministry of Interior announced on September 29th that it had seized more than 20,000 kg of drugs and precursor chemicals used in the production of narcotics. However, participants in a saffron-producing project in Herat have apparently been subject to attacks and threats from the Taliban, who want the farmers to grow poppy. In November trucks carrying saffron bulbs were attacked and the drivers killed. The farmers involved have said that the Taliban are the main purchasers of opium, and that the Taliban do not want saffron grown in areas where they want opium produced instead.

Aside from counter-narcotics efforts, the largest drop in production in the last decade is being reported owing to a disease that has affected large parts of the opium crop. The fall in production is unlikely significantly to affect the Taliban, however, primarily because the Taliban earn income from a variety of sources in addition to the drug trade.

Following a presidential decree in August 2010 specifying the closure of private security companies operating in Afghanistan, many such companies closed. However, the Afghan government has reneged on its pledge to close down these companies. Furious lobbying by private development agencies-which use significant numbers of security contractors for protection on donor-funded programmes-led the government to realise that the termination of security companies employing some 40,000 individuals in total would cause social instability, and that development programmes would have to be cancelled because the shortfall could not be made up by Afghan government forces. The Afghan government therefore announced on December 6th that modifications to existing frameworks would allow most security firms-including those working on development contracts, as well as those that were already protected from the disbandment order because they work for NATO, foreign embassies or the UN-to stay in business.

Since August the president's office and the Ministry of Interior had waged a campaign to close all private security companies by mid-December 2010. Initially, eight private security companies, including US-based Xe (formerly known as Blackwater International) were banned. High-level intervention by the US Department of State and the commander of the International Security Assistance Force (ISAF) in Afghanistan, General David Petraeus, prompted Mr Karzai not to implement fully the ban, however, because it would lead to the shuttering of aid programmes in many parts of the country, not least in the volatile south and east. Nevertheless, 54 companies were closed during the investigation process, and the total number of employees in the remaining 52 security companies fell from 40,000 to around 26,500.

Private security companies are widely blamed for contributing to instability and insecurity, not last through the payment of bribes to local Taliban and other armed groups not to attack them. A US senator, Carl Levin, has argued that reliance on private security contractors "has empowered warlords, powerbrokers operating outside Afghan government control".

In addition to private security companies, implementing agencies have also been linked to funding the insurgency. For example, Development Alternatives Inc (DAI), which is implementing the flagship Local Governance and Community Development project, was found to be paying a "protection tax" of up to 20% of individual project values. If this is accurate, it is estimated that US$5.2m of USAID funds were "at risk of falling into the hands of insurgents", according to a report by USAID's Office of Inspector General. (DAI is one of USAID's implementing agencies.)

The relatively stable city of Mazar-i-Sharif is experiencing an economic boom as investors look for opportunities in Afghanistan and turn away from the more volatile south of the country. (Mazar-i-Sharif is in the north, near the border with Uzbekistan.) In addition to a bumper crop of pomegranates, there are investment opportunities in oil and pasta production; Turkish companies have shown particular interest. Afghan entrepreneurs from Herat are also moving production of some industrial products, such as automotive parts for rickshaws, to Mazar-i-Sharif.

Raisin exports from Afghanistan will once again be reaching European markets after collaboration between MercyCorps, a US-based development agency, a farmers' co-operative in Parwan province and a British food producer, Fullwell Mill. Afghan raisin production peaked at 86,000 tonnes in 1981 before falling to less than one-quarter of that at the height of the Soviet war in Afghanistan (1979-89). Since 2001 production has increased to 25,000-30,000 tonnes a year, equivalent to about 3% of global supply. Dried raisins will be sold under the Fairtrade logo, which will mean bigger profits for local producers. Initially, the raisins will be sold only in the UK.

On November 30th the UAE hosted the first Afghanistan International Investment Conference in Dubai. The Afghan government presented opportunities for investment in agriculture, mining and infrastructure to more than 700 delegates. The hosts highlighted the example of the Fatma Bint Mohammed Bin Zayed Initiative, which supports women in carpet production in Kabul and Jalalabad, employing some 2,700 Afghans.