Article Type: Research Article Article Citation: Ghulam Shah Adel.
(2020). UNDERSTANDING LEGAL BARRIERS TO FOREIGN INVESTMENT IN AFGHANISTAN: A
CASE STUDY IN HERAT INDUSTRIAL ZONE. International Journal of Research
-GRANTHAALAYAH, 8(12), 80-102. https://doi.org/10.29121/granthaalayah.v8.i12.2020.2515 Received Date: 23 November 2020
Accepted Date: 28 December 2020
Keywords: Foreign Direct
Investment The Legal
Framework of Foreign Investment in Afghanistan Afghanistan’s Private Investment
Law Industrial Zone
of Herat Since a century ago, there have been many efforts to attract foreign investment in Afghanistan. These efforts include the codification of laws and policies and the provision of facilities for participation of foreign companies in the Afghan economy through partnership with the government and partnership with private sector in this country. Since 2001, with the support of the market economy system in Afghanistan's constitution and the reform of some governmental institutions, these efforts have been accelerating, hoping that encouraging foreign investors and their presence in the market will improve the economic situation. Unfortunately, these efforts have failed to meet the market expectations and the Afghanistan’s government purposes in order to attract foreign investment in Afghanistan. Even in 2014, and after that, the outflow of capital (domestic and foreign) has also been reported from the economy of Afghanistan. Various variables can be considered as an obstacle to the development of foreign investment in Afghanistan, war, corruption, lack of infrastructure, lack of energy, lack of trained workforce and non-accountability of the legal system are in this category. In this research, it was assumed that the existing challenges in different sectors of legal framework of foreign investment in Afghanistan are the main obstacles to the growth of foreign investment in this country. In order to prove the hypothesis, the study was carried out using the experimental research method by referring to the investors and experts in the economic zone of Herat in western Afghanistan. The research results indicate that in some sectors, the legal system needs to be reformed, but in general and by comparing the legal system with other variables, the measure of investors' satisfaction is satisfactory, and regulations are not as the main obstacle to the growth of foreign investment in Afghanistan, thus based on the analysis of data, the existing challenges in the laws and policies is not the main obstacle to the growth of foreign investment in Afghanistan. Therefore, it is necessary for Afghanistan's government to take into account the challenges such as security problems, corruption, lack of infrastructure, lack of energy and lack of trained workforce and take steps to address them.
1. INTRODUCTIONAfghanistan
has been interested in attracting foreign investment about a century ago, practical
and legislative measures have also taken place in various periods in this
context, but in practice, as Afghanistan's government and people expected, the
foreign investment did not grow. Considering the ongoing civil war and the
foreign countries’ military intervention, large volumes of external and
internal investments have also gone out of the country.
Afghanistan's withdrawal
from this unfavorable situation requires effective measures to be taken in
various economic and social spheres, including attracting foreign investment. Although after
the fall of the Taliban, the Afghanistan government, has carried out several
activities in the field of foreign investment and economic development, but
most of them did not have beneficial results in attracting foreign investors. Along with
other factors, the series of challenges in the Afghanistan legal system have
also prevented the growth of foreign investment in this country. The study
seeks to understand the legal barriers to the growth of foreign investment in
the economic zone of Herat in western Afghanistan. The researcher hopes to
identify the rate of investors' satisfaction to the effectiveness of the legal
system in this field and identify possible legal barriers. This research is
carried out in the economic zone of Herat, Afghanistan by empirical research
method. The researcher hopes that can provide some recommendations to develop
the Afghanistan legal system in the foreign direct investment area, from the
research findings. 2.
STATEMENT
OF PROBLEM
Foreign direct investment plays an important role in the
socioeconomic development of countries. All countries, particularly developing
ones, strive to attract this type of investment. The global market for
attracting foreign investment is very competitive. This competition is
especially high among developing countries, given their need for rapid
development and a shortage of national resources. In recent decades, an average
of 12% of GDP of the countries has been earmarked for economic investment. The
amount of foreign investment is one of the main economic indicators of the
countries.[1] There is a severe
shortage of capital in Afghanistan. Two-digit economic growth in 2012 was an
exception, because later it dropped to 2%.[2] This
situation places Afghanistan in the ranks of least developed countries,
economic development is one of the main keys to sustainable development,
stability and social welfare in Afghanistan; according to the characteristics
and challenges of Afghanistan’s economy we can say that attaining economic
development without foreign investment is very hard. Foreign investment hasn’t had a significant place in the
Afghanistan's economic growth. Although after the events of September 11, 2001,
with the flow of funds from more than 40 developed countries in Afghanistan, it
was expected that there would be growth in Afghanistan's economic and social
development. For this
purpose, from the beginning of forming the new system, the market economy was
supported in Article 10 of the Afghanistan's constitution, and several measures
were taken by policy-makers and legislators to establish a legally supportive
economic structure which can infuse growth in the economic sector and enhance
social welfare[3]. Increasing and promoting
domestic and foreign investment was considered as an effective factor in the
process of economic and social development. The government took up several
measures[4],
hoping to be able to develop foreign investment in this country. Unfortunately, the Afghanistan government's efforts and actions could not create a suitable environment to develop foreign investment and increase the trade turnover in this period. Even in some cases, and especially after the withdrawal of foreign forces, the outflow of capital from Afghanistan was increased. Various factors, such as the continuance of the civil war, and widespread corruption have had an impact on increase in poverty and lack of development [5]. The legal framework could not fully achieve its objectives, and as a result, the investors’ confidence in the legal system could not be raised which in turn failed to attract foreign investors to bring their capital in Afghanistan. In view of this, research is required to understand the legal barriers which deter or slow down foreign investment in Afghanistan, especially in Herat Industrial Zone. In the beginning, there will be the brief look at about the theoretical foundations of foreign investment and related concepts, also the foreign investment's background in Afghanistan will be briefly discussed. 3.
RESEARCH
OBJECTIVES
The study
seeks to understand the legal challenges and barriers that foreign investors
face to the development of their investment in Afghanistan. To achieve this
goal, the following objectives are addressed: 1)
Investigating
and identifying main barriers to foreign investment growth in Afghanistan; 2)
Investigating
and identifying the position of legal barriers, among other challenges in
foreign investment in Afghanistan. 3)
Identifying
the legal areas that are most challenging in terms of foreign investment growth. 4)
Collecting
and summarizing the participants' suggestions on improving foreign investment
growth in Afghanistan. 5)
Providing
recommendations to legislators and policymakers to reduce the barriers and
challenges of foreign investment in Afghanistan. 4.
REVIEW
OF LITERATURE
There are many scientific resources about the foreign investment in different countries around the world. In a doctrinal research method these great resources are very helpful, but in Afghanistan there are not enough empirical or non-empirical studies in the field of foreign direct investment laws and policies. As you know this is an empirical research, and the researcher has to refer to domestic empirical data about the challenges and barriers to the foreign investment development’s in Afghanistan especially in the Herat economic zone. In this field and similar subject an independent empirical research has not been done in this country, so researcher will have a short focus on the laws, policies, guidebooks, reports and regulations in the investment area in Afghanistan, also will point to the few academic studies implemented in this field. 4.1.
REVIEW OF
DOCUMENTS
Some
Afghan and international organizations such as Afghanistan’s economic
ministries, World Bank, the United States Embassy in Kabul, USAID and etc. published guide books, national economic
reports that some part of these documents are about investment situation in
Afghanistan. The Afghanistan National Development Strategy (ANSF), as a
credible government document, has defined the size of its economic development
with the participation of the private sector. This document is known as a
general guide for ministries and government departments
in Afghanistan. On
this basis, most state institutions and private sector unions have developed
their own plans based on this document.[6] Ministry of Finance of Afghanistan presented
its economic prospect at the Tokyo Conference on
2013-2014. At this time the majority of the foreign forces have gone out of
Afghanistan and the same time the people and investors have experienced a disappointing
situation in this country. This instrument has indicated support for
internal/external private sector in investment part in different field like
industry, agriculture, building, mine and so forth. Land grant and providing
necessary facilities in industrial towns, long term tax encouragement policies,
facility of availing for loans with low interest and rate, reduction of
tariffs, dispense annual immigration visa and other encouragement policies has
tried to meanwhile encourage internal/external investors to invest in
Afghanistan.[7] Among
other instruments, which are prepared by the Afghan government, guidance for
investment in Afghanistan is a book that
published by Ministry
of Commerce and industries in 2014. This instrument has tried to make necessary
guidance in developing businesses. This instrument introduces, with details,
all subjects related to exports and imports, private investment law, short
introduction of norms in the field of economy and commerce of Afghanistan,
money transfer, banking and financial
affairs, manner of
paying tax, rules on appointment, introduction of the institute in investment
affairs, the introduction of banks and economy institute. The “Report on the analysis of investment
trends in Afghanistan: challenges and opportunities” focused on the study and
analyses of private investment situations (domestic and foreign) by Afghanistan
investment association. Naming the amount of investments during these years;
the employment statistics that have been taken and determined the amount of
foreign investment by service, productivity and mining are the key issues in
the report.[8]
The Afghan Ministry of Commerce has introduced opportunities for foreign
investors by developing a policy to encourage private investment, providing
legal supports, tax and banking facilities to encourage foreign investment.
This work can be invoked and used by investors as a commercial-legal guide[9]. The Investment Support Agency released
an analytical report on the Afghan Investment Process Motives and Challenges in
2005. This work addresses some of the obstacles facing investment in
Afghanistan, including the introduction of some legal problems.[10]
The Relationship between Foreign Direct Investment (FDI) and Economic Growth in
Afghanistan: An Economic Analysis is the title of one article that focused on
the status of foreign investment in Afghanistan but from the economic vision.
The researchers used a large number of external resources in the field of foreign
direct investment and tried to match this information with the Afghanistan
situation. [11]
The study
of the factors affecting the flow of foreign investment in Afghanistan is the
title of an article by Roohullah Bayat
and Mohammad Amin Askari at Imam Khomeini International University of Qazvin
Iran. In this paper, researchers investigated six variables as factors affecting
the status of foreign investment in Afghanistan. In this study the economic
open system has been known, as the first factor that has effective foreign
investment growth in Afghanistan, also the security challenges is as the main
barrier in front of FDI growth.[12] In
addition, Maximilian Kuhn and Mohammad Javad Jannatifar in “Foreign direct investment mechanisms and
review of Iran s buy- back contracts: How far has Iran gone and how far has may
it go?” Believe, for Political reasons, Iran’s role in global energy politics
is consistently declining as three decades of international divisions, coupled
with crippling international sanctions, have left Iran unable to capitalize on
its vast energy potential, However, once these political issues have been
resolved one way or the other, the second, most important issue will remain:
the direct investment mechanism for foreign investment into the Iranian energy
sector- the buy –back contracts. This article sheds lights on Iranian
concision, contracts and other forms of investment, development, analysis, and
their legal bases[13].
Moreover, Selma Kurtishi-Kasrati in her research,
“The effects of foreign direct investments for Host Economy”[14],
believes foreign direct investment (FDI) is the fundamental part for an open
and successful international economic system and a major mechanism for
development. In this circumstance, the paper examines the benefits of FDI as a
key component for successful and sustainable economic growth and as a part of a
method for social improvement. The aim is to highlight the most important
channels through which FDI makes a significant and exceptional impact on the
economic development of the host countries. Since
the independent research still has not been conducted to identify the
challenges facing foreign investment in Afghanistan, especially the
identification of legal barriers to foreign investment in a specific economic
zone like Herat, researcher hopes to open a window to start scientific research
in this area in Afghanistan. 4.2.
THE LEGAL
DEVELOPMENT OF FOREIGN INVESTMENT IN AFGHANISTAN
The modern investment, legal story in Afghanistan has
started since 1865 in a Loya Jirga (Afghans Major
Assembly). Over 1880 government supported manufactures and between 1907 and 1919 royal orders
provided mixed (domestic and foreign) and foreign investment.[15]
Subsequently, some Turkish and German companies participated in the Afghan
economy.[16]
In the constitution of 1963, it was attempted to maintain the private and
government investment. In 1980 private ownership was considered illegitimate
and, therefore, the issue of attraction of foreign investment was withdrawn
from the government’s agenda. The new constitution in 2005 approved the market
economy as the economic system of Afghanistan.[17] More than 40 laws have directly or indirectly
effect on investment in Afghanistan. They are basically adopted to regulate
private investment (internal and external), banking, commercial companies,
commercial contracts, commercial documents, bankruptcy and filtration,
resolution of commercial disputes, imports and so forth. These legislations
include commercial law, private investment law, the law of joint companies and
limited responsibility, the law of insolvency companies, cooperatives law,
commercial contract law, commercial mediation law, commercial arbitration law,
principles of commercial trials law, commercial agencies law, commercial
registration of marks law, copyright law, protection from inventor and explorer
law, standards law, competition protection law, imports law, low process of
petroleum products, insurance law, banking law, labor law, public tax law,
regulation of land matters law, procurement law and some other laws.[18] Afghanistan’s private investment law is enacted pursuant to Article (10) of Afghanistan’s constitution, for the aims to increase the role of domestic and foreign investment in the economical field of the country. In this law, Legislator anticipated creation of high commission of investment and defined its rights and responsibilities. Although this law has enacted in order to encourage domestic and foreign investment, it has not complied with the expectation of investors, especially foreign investors. 5.
RESEARCH
QUESTIONS
1)
Are
Legal Challenges the Major Concern of Foreign Investment in Afghanistan? 2)
What
are the main barriers to foreign investment growth in Afghanistan? 3)
How
is the position of legal barriers, among other challenges in foreign investment
in Afghanistan? 4)
Which
legal areas are most challenging in terms of foreign investment growth? 5)
What
are the participants' suggestions on improving foreign investment growth in
Afghanistan? 6)
What
are the main recommendations to legislators and policymakers to reduce the
barriers and challenges of foreign investment in Afghanistan? 6.
HYPOTHESES
Various variables affect the flow of foreign investment
in Afghanistan. Some of these variables are: the security situation, the rate
of corruption, the degree of legal certainty, the rate of inflation, the
corporate tax rate, the degree of openness of the economy, the share of
subsidies and government support, financial guarantees, and economic freedom.
The legal framework of foreign direct investment is one important variable on
foreign direct investment and economic development growth. Along with other
variables, the legal system has played a weak role in attracting foreign
investment in Afghanistan. In order to identify the challenges in the legal
system, the following hypothesis is explored in this paper: 6.1.
MAIN
HYPOTHESIS
“The legal
framework of foreign direct investment in Afghanistan could not attract
substantial foreign investors to bring their capital and expertise in this
country”. 6.2.
ASSUMPTIONS
Given that our discussion relates to the recognition of
legal barriers, part of the above formulation is being explored in this
realization. First, the position of legal variables will be recognized among
other variables, and after that the various legal factors will be evaluated.
The Afghanistan’s Private Investment Law, judicial system, land access laws,
banking system, business names protection and business model laws, tax and
finance system, regulations for obtaining a license, rules for setting up trade
contracts and resolving trade disputes; are legal subjects that will be
evaluated in this research. To better understand the legal variables in this
research, the following assumptions are expressed: In addition to legal factors, insecurity and civil war,
corruption, lack of infrastructure and energy are the main obstacles to the
growth of foreign investment in Afghanistan. Relatively, the legal system of
Afghanistan can’t meet the needs of foreign investors in this country. The
Afghanistan’s Private Investment Law, in its essence, has great advantages for
foreign investors, but the enforcement of law is difficult in this country. The
Afghanistan judicial system so far and as necessary has failed to win the
confidence of foreign investors.
The land access laws in Afghanistan have not been able to fully satisfy foreign
investors. The Afghanistan banking system has not provided the necessary
facilities for providing financing and money transfer to foreign investors. The
names protection and business model laws in some cases have been failing to
provide a suitable environment for business competition in Afghanistan. The
Afghanistan tax and finance’s legal system has provided facilities for attracting
foreign investment, but in practice, the goals of the legislature have not been
fully fulfilled. The regulations for obtaining a license to invest in
Afghanistan provide the necessary facilities for foreign investors. The rules
for setting up trade contracts and resolving trade disputes are unfamiliar to
most of investors in Afghanistan. At the end there are probably some other
legal barriers in front of the foreign investor in Afghanistan.
7.
OPERATIONAL
DEFINITION
There are some
main variables in the foreign investment field such as security, the legal
system, corruption, and bureaucracy, infrastructures, and energy, raw
materials, and Professional labor force. In this study relationship between the
legal framework of foreign direct investment and foreign direct investment
growth is evaluated, so this concept foreign direct investment as a dependent
variable, the foreign direct investment’s legal framework in Afghanistan as
independent variable and the Herat Industrial Zone as population of study will
be considered. 7.1. FOREIGN DIRECT INVESTMENT
“Foreign
direct investment (FDI) is an investment made by a firm or individual in one
country in business interests located in another country. Generally, FDI takes
place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling
interest in a foreign company. Foreign direct investments are distinguished
from portfolio investments in which an investor merely purchases equities of
foreign-based companies”[19].
Foreign direct investment has experienced in multiple of ways, such as opening
a subsidiary or affiliate in a foreign country, obtaining controlled benefits
in an existing foreign company, or merging or joint investing with a foreign
company. The concept of foreign direct investment as a dependent variable in
this research is considered, which includes all types foreign direct
investments in Afghanistan, such as: investing in manufacturing, mining,
packaging, banking, Information technology and telecommunications, trade and
services. 7.2.
LEGAL
FRAMEWORK OF FOREIGN DIRECT INVESTMENT IN AFGHANISTAN
The last
private investment law in Afghanistan was approved on December 21, 2005, within
the framework of 33 articles to encourage and support foreign and domestic
private investment in this country. The prohibition of government
discriminations in dealing with domestic and foreign investors, fair
compensation in the event of confiscation of investor's assets, the
introduction of various types of investment companies that can operate in
Afghanistan, the private sector ownership types, the right to obtain a license
for investment activity, having the bank account and the right to transfer 100%
of the income abroad, the right to choose the procedure for disputes. The
introduction of centers for resolving international trade disputes and the
right to long-term lease of land are the major issues that foreign investment
law addresses. Also in the Afghanistan, there are about 40 titles of laws in
various areas such as: commercial companies, commercial contracts, transit and
transportation, banking, insurance, customs duties and taxes, trade disputes,
labor, competition, mines, production, supply of services in various sectors
and other domains that somehow have affective on the flow of foreign direct
investment, so the legal framework of foreign direct investment is including the Private Investment Law in
Afghanistan and all types of laws and policies that they have related or effective in the
foreign direct investment area in Afghanistan as independent variable. 7.3. HERAT INDUSTRIAL ZONE
Herat is one
historical and economical province in northwestern Afghanistan, also is one of
the major investment hubs and industrial pole in this country. The Herat
Industrial town was founded in the Gozara District in
2002. The majority of investments and most of the Herat factories are in the
Herat Industrial town, and a number of factories are in the other areas around
the city of Herat. The purchase and sale of goods and currencies are
usually carried out in the central markets of Herat. Herat Industrial Town's
products are supplied to most regions of Afghanistan and some neighboring
countries. Production and packaging of food, detergents, wires and cables,
polyethylene pipes, kitchen utensils and plastic items, household appliances,
carpets, non-alcoholic beverages, mineral water, different juices and iron in
this industrial town are being produced. In recent years, due to insecurity,
lack of government support, and the increase in corruption, about half of the
400 manufacturing plants in the city have been disabled. Of course, over the
past two years, 20 new factories have been inaugurated and 60 factories have
expanded their field of activity.[20] 8.
RESEARCH
METHODOLOGY
This research is empirical research that
seeks to identify legal barriers to foreign investment development in
Afghanistan. Keeping in view the temporal and resource limitations, this
empirical study has been done in the Herat Economic Zone, western Afghanistan
(HEZ). It is worth noting that all parts of Afghanistan are not economically or
not accessible, but the Herat Economic Zone is an area which has favorable
environment comparatively for economic development and investment in
Afghanistan and researcher can collect data from this area. There are internal
investments, foreign and domestic joint investments, and some foreign
investments. To understand the legal framework and theoretical foundations of
the research subject the legal resources, including laws, policies, guidance,
books and formal reports issued by relevant government agencies and
international organizations have been investigated initially also some articles
about foreign direct investment in Afghanistan and other countries have been
studied. According to these studies, a questionnaire has been developed to
identify the legal barriers to the growth of the foreign investment. This
questionnaire has 13 questions that ten questions have two parts. The first
part is a multiple-choice question and the second part is descriptive. For
completion of this questionnaire and conducting an interview researcher
referred to a number of law and economics experts also to the foreign and
domestic investors. The prepared data consists of two parts. The first part is
statistical information that is prepared for the responses of participants to
multiple choice questions. This information was first tested by the SPSS and
Excel software. The second part of the data achieved from the detailed section
of the questionnaire or by interview. Also, there are some data which were collected
by observation or researcher experiences. The data in this research analyzed
based on the research arguments methodology that the researcher applied the
inductive research method to better understand the facts. 8.1.
STATISTICAL
POPULATION, SAMPLING METHOD AND SAMPLE SIZE
In order to
obtain scientific results in this study, the impact of laws and policies on the
status of foreign direct investment is examined through mixed methods that include
both quantitative and qualitative research. The universe of the study are
foreign investors, government officials, economists and lawyers relevant to the
Herat economic zone. Considering that there are not many foreign investment
companies in Herat, and some of them are unwilling to complete the
questionnaire or participate in the interview, the researcher has tried to
collect data from all available foreign companies, and some experts in the
Herat Economic Zone. The experts are some lawyer and economists which have
experience in both public and private economic sectors in Afghanistan. To
complete the questionnaires, the participants were selected on the basis of a
simple probability sampling method. The interviewees have been chosen from
among those who are practically engaged in the foreign investment area in
Afghanistan or their responsibilities are in the relevant private or public
organizations, they were selected by Judgmental sampling. In this study,
19 questionnaires were distributed, and all of them were completed and
collected, researcher interviewed with two foreign investors and two senior
officials of Herat Chamber of Commerce and Industry. It is worth noting that,
each part of the interview will analyze and compare with relevant multiple-choice
questions, so there is no a specific section for analysis of the interview
data. 8.2.
DATA
COLLECTION METHOD
The data for
the research is collected through different research methods. A part of the
information is obtained by observing the status of foreign investment and the
researcher's experiences during some years as a legal expert dealing with
domestic and foreign investors and traders. Another part of the information was
obtained through interviews with stakeholders in investment affairs by semi-structured
interview. The basic questions have been structured before started the interview, but
interview completed by some open questions. As previously mentioned, in collecting the
data for the research, the questionnaires and interview are the data collection
tools. There is one question to understanding the interviewees’ knowledge and
field of work. Also offered 9 multiple choice questions to understanding the
barriers to the foreign direct investment development in Afghanistan, and each
question has two parts, there are multi choices to respond in the first part of
9 questions, that the participants chose one of them. The second part is
descriptive, so some of the participants mentioned their opinion or experiences
in this section. They are including two general questions, and 7 questions in
specific legal, economic areas; for example, general variables are included in
the 4th question, so the legal framework of foreign investment has
been compared in this question, and the 5th question is about how is
the person's judgment about the legal framework of foreign direct investment in
Afghanistan. The others multiple choice questions are about various specific
legal areas that relate to the foreign investment. Also, at the end of the
questionnaire there are two others descriptive questions to understanding the
recommendations and advices from interviewees. The quantitative data that
collected by questionnaires, analyzed by SPSS and Excel tools. The data that
collected from the interviews are analyzed by quantitative method. At the end
of the analysis, we will have a general judgment about the role of the legal
framework of foreign direct investment in Afghanistan on the development of
foreign investment in this country. The data were collected in the form of hard copy and soft copy and analyzed
quantitatively using SPSS and Excel softwares. The
explanatory part of the responses was analyzed in an inductive and descriptive
manner. 9.
RESEARCH
LIMITATIONS
Such as other
researches, also there are various limitations to completing this study, that
will be introduced in the following sections: 9.1.
LIMITATIONS OF RESEARCH METHOD
This is empirical research that to implementation it will
be used the quantitative research as the main research method. To develop the
questionnaire and making the interview questions, it is necessary to refer to
the secondary sources that include official documents and scientific works in
this area. Access
to scientific resources and official documents, the weakness of the research
culture, financial and time problems, and some other issues have created
limitations to the implementation of this study, that will be discussed the
below: 9.1.1. SAMPLE
SIZE Definition and structure the research on the sample size
is not easy in terms of the type and method of research. Laws, regulations,
policies, and procedures have been put in place by the legislative and
executive institutions of Afghanistan. So, the definition of the theoretical
framework is very difficult in the concept of the unit. There are various laws,
policies, and regulations that have been made of the foreign investment's legal
framework in Afghanistan. Also, there are some economic zones in different
places in Afghanistan, that all of them are not available to the researcher, so
it is difficult for the researcher to select both parts (literature review and
sampling). Despite the challenges, the scholarly studies Afghanistan laws and
policies and makes the questionnaire and interview form. Also, considering that
access to the Herat economic zone in western Afghanistan is easier for the
researcher, and there are enough foreign investors, lawyers and economists, the
sampling will be selected from this economic zone. 9.1.2. LIMITATIONS OF AVAILABLE AND VALID INFORMATION Unfortunately, scholarly research in Afghanistan has not
been considered very important. This area is severely affected by the lack of
available and credible academic resources, including on this subject of
research. The lack of regular government archives also reduces the access of
scholars to official documents. Nonetheless, the researcher is going to do this
study and will conduct the validity methods to achieve a credible scientific
result. 9.1.3. LACK OF PREVIOUS RESEARCH DATA WITH RELEVANCE TO
THIS RESEARCH Given that there
has not been independent and credible research in Afghanistan. We should not
expect the availability of reliable and accessible scientific resources,
because scientific institutions have not addressed this issue. However, a few
articles have been published by law and economics students, but they are not
enough, but there are comparative studies from other countries that can be as
patterns for the researcher. 9.1.4. MEASURE USED TO COLLECT THE DATA Although it is difficult to measure data in
the statistical society like Afghanistan, the researcher hopes that the data
collected from the economic zone of Herat in western Afghanistan can be
measured scientifically and can be generalizable to all other Afghanistan’s
areas. The credibility
of the information provided by the researcher will be questioned, the
researcher has to use validity methods to collect primary data. Sometimes the
information provided is researcher may not have academic validity. The
researcher also strives to add one article to the scientific journals of the
world. 9.2. POSSIBLE LIMITATIONS OF THE RESEARCHER
Like any other research, the investigator feels
limitations in front of it in this research, and some of them are included: 9.2.1. IN THE FIELD OF ACCESS TO RESOURCES, ORGANIZATIONS AND INDIVIDUALS The lack of resources and standard scientific
centers, the widespread corruption and organization's bureaucracy in the
context of meeting with important and qualified individuals include the
researchers' limitations, which makes it difficult to access sufficient and
reliable data. But the researcher will try to solve these issues in light of
his experience in Afghanistan. 9.2.2. LACK OF RESEARCH CULTURE Undoubtedly, all
the scholars in Afghanistan have experienced this problem. Society, private and
public institutions do not have a good opinion on the research programs and do
not have a good collaboration with the researcher. Official agencies in the government
think that their official documents are being used during research. Ordinary
people do not really believe in the research results. Therefore, in cases where
it is necessary to refer to the relevant authorities for information, we must
be sensitive and precise. So, the investigator's behavior should not slow down
or discontinue the organizations and people cooperation in the field of
investigation. This Ph.D. program is not a scholarship from the
governments of Afghanistan or India. The
researcher has to complete this research by own money. He believes the great
God and his efforts. 9.2.4. TIME LIMITATION Investigative work with this volume required a longer
period, but the researcher has been trying to use carefully
this short time, and in the end, could achieve the scientific result.
Consequently, and given the fact that there is no research without limitations
and problems. At the end of the work, researcher hopes to have a higher
scientific result to Afghanistan academic and economic communities. 10.
RESEARCH
FINDINGS
In order to achieve the research goals and to find the answer to the research
questions, a questionnaire with the following characteristics was made: the
first question related to the respondents' level of knowledge and field of work
and the second question is to determine the status of the legal system among
other variables to develop foreign investment in Afghanistan. The third
question is to understand the overall judgment of the participants in relation
to the effectiveness of the legal system. Subsequently, the participants'
satisfaction with the various laws that are effective in investment will be
examined in eight questions. There are two descriptive questions at the end of
the questionnaire about other legal obstacles and participants' recommendations
and suggestions to develop the laws in the field of foreign investment. Therefore,
each multi-choice section question will be analyzed by using the quantitative
research method tools such as Excel and SPSS. The analytical part will be
analyzed with respect to the qualitative method. In the end, the final
evaluation is going to make by the compare and unified the results of the
different sections. All of 19 distributed questionnaires to the participants have been
completed. The participants responded to all multi-choice questions and some of
them notice their opinions in the descriptive part, so it shows a high validity
of research result. At the beginning of the analyzing, both part (multiple choice and descriptive) of each question will analysis and it result will be expressed. In the second step, an overall assessment of all the information is done and the answers provided are compared. In the final stage, the research hypothesis will be tested that it has been approved or based on the obtained results, has not accepted. 10.1.
DATA
ANALYSIS
This table specifies the numbers, subjects and kinds of questions in the questionnaire:
The
first question has two parts, first part is about the participants’ field of
work and the second part is about the participants’ educational level. We will
start our analysis from first question:
Figure 1: The Participants' Field of Work The table above represents the field of work of the participants. There are about 42% of them of expert, 37% of them are foreign investors and 21% of them are domestic investors. The presence of lawyers, economists, and foreign/domestic investors in this statistical population show the professionalism of the results provided by this research. Figure 2: The
Participants' Education Level This chart shows the education degree of the participants, including about 37% of bachelors, 31.6% of the masters and 31.6% of Ph.D. The presence of educated people who are not much in Afghanistan is indicated, that the respondents have the necessary knowledge and expertise in the legal and investment systems, as most of Ph.Ds. are from the experts. This issue will increase the confidence of the researcher in the strength of the results of this research.
Figure
3: The Status of Legal Barriers Among the Other
Challenges Given that
there are many barriers in front of foreign investment in Afghanistan, we asked
in the first question how is the position of the legal
barrier between the other factors. As observed, 5.3% of the participants
have chosen Corruption and bureaucracy. 36.8% of participants have chosen war
and security problems. 5.3% of them have chosen a legal system consisting of
laws and enforcement agencies. 10.5% of the participants have selected Lack of
infrastructure, energy and specialist laborers. However, 47.4% of respondents
have selected all items that the also legal issues are among them. It is
therefore concluded that legal problems are not the first and foremost obstacle
to the growth of foreign investment in Afghanistan, but all variables are
considered to be a collection of obstacles in front of foreign investment
growth. Also, the
interviewees believed; among the variables such as the war, the lack of
infrastructure, legal system, corruption and the common bureaucracy in
government organizations, the problems in the legal system are not the main
concern of the foreign investors. But the main obstacle is insecurity and
continued war, also lake of infrastructure is more importance of the legal barriers.
This shows the confidence of investors and professionals to Afghanistan's
foreign investment legal framework.
Figure 4: The Overall Judgment about the Legal Framework of FDI in Afghanistan The second question was designed to get the participants' opinion about the efficiency of the Afghanistan legal system in attracting and expanding foreign investment. In answer to the above question, 50% of the participants have selected the medium option, and 25% of participants believed that the legal system acted low in response to the needs of foreign investors and 6% have selected the very low option. In the meantime, 6% of the participants have chosen the high option. From the set of responses of participants, it follows that the Afghanistan legal system can attain an average level of investor satisfaction for investment in Afghanistan. Overall,
respondents 'opinions with the current state of affairs are satisfactory, but
most of the interviewees were not happy about the implementation of the laws. Some
experts have believed that the contradictions in the legal system, can create a
complete lack of confidence in this system. The interviewees also stated that the
existence of variables such as war and corruption has caused people and
investors to pay less attention to the quality and efficiency of the laws.
Figure 5: The Average of Participants' Satisfaction with the Private Investment Law in Afghanistan With regard to the effectiveness of the Afghan Investment Law, 47.4% of the participants have chosen high option and 10.5% of the participants have chosen the medium option. While 36.8% have chosen low option and only 5.3% have chosen very low option. It is therefore concluded that this law can be relatively satisfactory to investors. Of course, with interviews with experts, most of the participants believed that there are problems and disadvantages in implementing this law, and most of them believed the investment law in Afghanistan is a suitable law, because this law provides a lot of facilities in the fields of obtaining business licenses, the full transfer of capital and interests, resolution of conflicts, types of partnerships, economic freedoms, and so on to the external and internal investors. The content of
private investment law in Afghanistan has partially satisfied the participants.
However, for better implementation of this law, recommendations in the field of
establishment of a specific entity, the promotion and re-examination of foreign
investment laws in light of the economic requirements of the country and the
interests of the people and protecting the interests of the investors have been
raised.
Figure 6: The Average of Participants' Satisfaction about the Afghanistan Judicial System The correct quality of judicial decisions
is a concern that most investors, especially foreign investors, express in
their dispute resolution. In order to measure the level of trust of foreign
investors in the field of Afghanistan’s judicial system, this issue was raised,
that, 31.6% of the participations have chosen very low option and 15.8% have
chosen the low option. While the other 31.6% have chosen medium option and
21.1% have chosen the high option. These statistics show that the goodwill of
investors is not satisfactory with respect to the Afghanistan judicial system.
In interviews, the majority of foreign investors did not believe in the
efficiency of the judicial system. The country's judicial system is one of the less trusted cases of investors
and professionals. Most of interviewees believed reform of the judicial system
in recent years has not yet been able to satisfy the beneficiaries, so this
section will require to take more effective measures. Although some of them
thought the Afghanistan judicial system is going to correct way, and it can
achieve the investors’ satisfaction as soon as possible.
Figure 7: The Average of Participants' Satisfaction about the Land Access Laws in Afghanistan Under the Afghanistan laws, foreign
investors cannot become landowners in Afghanistan. They can lease contracts
with the government or people to achieve land for up to 50 years. This has
created concerns for foreign investors. Particularly for long term medium-sized
investments that in this kind of investment the investors need land for to their
invest for an economic reasonable time. Also, under the existing rules, there
are some important concerns like, rent presider, partnership with an Afghan
partner and corruption in the government offices. Therefore, relationship
between the rules governing land access and foreign direct investment
development is the one main issue that analysis on this part. In answer to this
question that “in your
opinion, to what extent can land access rules in Afghanistan make investors
more access to land?” 5.3% of participants have
chosen very low option and 36.8% have chosen low option. At the same time, the
26.3 percent of the participants have chosen medium options. Also, 26.3 percent
have chosen high options, and 5.3 percent have chosen very high option. The
statistics show that the laws in this area have been able to achieve the
satisfaction of investors. In this
regard, the majority of interviewees have also complained about the existence
of corruption in the distribution of land to investors, as well as the
distribution of land to the
powerful people and those who are not eligible. Investors are relatively satisfied with
the land access laws, but some foreign investors and experts suggest that if
the issue of foreign investor ownership of land be acknowledged by the legislators,
it can be effective in reducing the concerns of foreign investors. Also, a number
of respondents have believed that the corruption and distribution of land to
the powerful people are known as reasons of investors’ distrust to law
enforcement agencies.
Figure 8: The Average of Participants' Satisfaction about the Banking Legal System in Afghanistan The banking system and the rules governing
the functioning of banks are recognized as an essential element of the business
and investment industry.
A foreign investor has concerns about the transfer of
his/her capital, benefits, borrowing, and current accounts, that all of them are
related to how banks operate in one country. By answering this question, “How do you think the legal framework of
the banking system in Afghanistan can respond to the needs of foreign
investors?” 5.3% of the participants have opted for the
very low option and 5.3% have chosen the low option. At the same time, 52.6
percent have chosen medium options, and 36.8 percent have chosen very high
option. These statistics show the satisfaction of the majority of interviewees
with bank rules. But the some of the interviewees believed that the banking
system and money transfer were influenced by the traditional currency exchange
activities, and the majority of banks had not been able to respond to market
demands as it was. Interest rates, high bureaucracy in the borrowing system is also
another problem that investors face. The performance of the banking system is approved by investors and experts
in the light of existing laws. However, extensive and uncontrolled currency
exchange, the slow and complex process of obtaining loans, high-interest rates
and absence of the banking support policies, are problems in this field. Also,
they have negative effects on the development of the banking system.
Figure 9: The Average of Participants' Satisfaction
about the Trademark Legal System in Afghanistan In view
of the importance of trademarks in industrial societies, governments have
enacted rules in their national law to protect these signs. In the
international trade system, legal documents have also been introduced,
Including Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS). Afghanistan revises its laws in accordance with the TRIPS Agreement in
recent years. This has led the participants to make a positive assessment of
the rules for protecting trademarks. Their answer to this question “Is the rules
for protecting the name and business model helpful and effective?” are: 5.3% of the participants have chosen the low option but the 26.3% of
participants in this study considered the rules for protecting the name and
business model as acceptable in the medium, and 68.4% of the participants have
chosen high option. The results of the interviews concluded that the laws in
this area were standard and managed to satisfy the enthusiasm of investors and
businessmen. In the area of the protection of the name
and business model, the level of satisfaction of interviewees is high, which
indicates the laws in this area are standard. Also, the most of interviewees
believed, that the performance of the judicial system is also satisfactory in
this regard.
Figure 10: The Average of Participants' Satisfaction about the Tax and Finance Legal System in Afghanistan The structure of the tax system and tariffs
have a direct impact on the prosperity of trade and investment growth in
countries. With the admission of the market economy and joining Afghanistan to
the World Trade Organization, this country is bound to comply with the
regulations of the market economy system in the area of customs
tariffs. On the other hand, on the basis of encouragement's policies and
protect the investment and the content of the private investment law, there are
many benefits to investors in Afghanistan. At the same time, it must be
admitted that it is not easy for investors to achieve their benefits from the
corrupt administration of Afghanistan. Anyway, about efficiency of tax and financial
system asked this question “How much the Afghan legal taxation system can bring confidence to foreign
investors?” the participants answers are: 10.5% of the
participants have chosen the very low option, 26.3% have chosen a low option,
42.1% have chosen medium option and 21.1% have chosen the high option. Which
indicates the relative satisfaction of investors with tax and finance laws.
Also, the majority of interviewees believed that in practice the tax and finance
laws were not being applied in the correct and complete manner, and this has
caused problems for investors. The satisfaction of interviewees from the tax and finance systems is
modest; private sector proposals for reforming the tax and customs regulations
are often accepted by the government. However, a number of interviewees have
argued that corruption in the implementing organizations has prevented the
investors' trust in the tax legal system.
Figure 11: The Average of Participants' Satisfaction About the Obtaining Business Licenses in Afghanistan The Afghan Investment Support Office was
established in September 2003 as an investment license distributor but has now
become an active entity in attracting, encouraging and
expanding investment and creating industrial parks in Afghanistan, also this
office is one part of the Afghanistan ministry of trade and industries. Currently,
this office issues the license for domestic and foreign investors in the
simplest form to invest in Afghanistan. As a result, Afghanistan ranked 24th
in the world in the World Bank's report in this area, also World Bank Report
Index in 2014 and ranked first in South Asia. This has caused the participants
to be satisfied with the process of distributing the license to invest at a
high level. In terms of rules for distributing business and investment licenses
question was: “How useful
and standard are the steps for obtaining business licenses in Afghanistan?” The
68.4% of the participants have chosen the high option
and 21.1% of the medium option, which indicates that the majority of investors
are satisfied with the laws and the methods of enforcement laws in this area.
Approximately 10% of the respondents in this section have chosen low or very
low options. Of course, during the interview, a number of interviewees
complained about the easy procedure of distribution of the investment license,
although from the benefit of this easy procedure only Afghans investor can use.
The process of distributing
business licenses and investment in Afghanistan has been a successful
experience. This represents a good experience of the private sector and
government cooperation in Afghanistan.
Figure 12: The Average of Participants' Satisfaction about
the Rules for Regulating Contract and Resolving Business Conflicts in
Afghanistan The rules for the regulation of commercial contracts and the laws relating to commercial conflicts can be relatively satisfactory to the beneficiaries. Of course, most interviewees stated that in many cases, contracting and trade conflict solution takes place under the customary system, which this approach in practice causes problems for foreign investors. The laws for contracts and solving business conflicts have been able to satisfy the satisfaction of investors and the private sector. The question in this area was: “In your opinion, how can the rules of regulating contracts and business partnerships meet the needs of foreign investors in Afghanistan?” in the answer 10.5% of the participants have chosen low option, and 52.6% of the participants, have chosen medium option, and 36.7% of them have selected the highest option. These statistics show the participants’ satisfaction with the appropriateness of these rules, but in the interviews, a number of participants have noted that the traditional system of contracts and the conflict resolution through unofficial sources are used in the practice. This approach made very weak the role of the formal legal system in this area. According to some interviewees, the promotion of legal and contractual contracts as well as the resolution of conflicts through the methods in the context of the legal system, also reduce the problems of feigning investors in interacting with their Afghan partners. In the 12th question asked from
participants that: “In
your opinion are there any other legal barriers in front of foreign investors
in Afghanistan?” In the opinions of most of the participants some issues such
as the lack of a comprehensive private ownership system, non-standard insurance
services, and lack of credible arbitration and mediation centers are other
obstacles facing foreign investors in Afghanistan. In the 13th question asked from
participants that: What
are your specific suggestions on ways to increase foreign investment in
Afghanistan? The elimination of barriers to goods transit, government
investment in the infrastructure sector, the establishment of a national center
for supporting foreign investment, and recognition of different methods of
foreign investment, are subjects proposed by the participants. The other problems that have been reflected
by interviewees are the following: Lack of adequate legal support for investment in areas such as: public
utilities, infrastructure and mines; failure to enforce insurance policies and
the weak role of insurance companies in the Afghanistan market. Lack of stock
market law and the rules and regulations of the stock market regulator in
Afghanistan. The weakness of the law on the institutionalization of the private
property system, especially in the field of foreign investment. Lack of legal
rules and regulations on the implementation of compensation during war, and
natural disasters. 10.2.
A GENERAL
INFERENCE
The
participants" opinions about the private investment law and the
performance of the judicial system in Afghanistan show a medium level of satisfaction,
in these areas it is required to review laws and policies and bring more
effective reforms in practice. The satisfaction of participants about banking,
tax, and land laws have been reflected at the good level, but there are
obstacles in the implementation of these laws. The laws in fields of the
trademark, issuance of investment licenses, the contracts and the resolution of
trade disputes in terms of both the theory and the executive dimension have
satisfied the participants to a high level. The performance of Afghanistan
government in the field of licensing to the investment sector is a successful
experience and can be used as a good pattern in other economic investment
areas. It was concluded that the legal framework for foreign investment in
Afghanistan could reach the average satisfaction of foreign investors, and this
is not the main obstacle to growth of foreign investment in Afghanistan. In order to
strengthen the above inference, the data gathered from participants are
summarized in chart 13th: As can be seen, about 75% of the participants'
opinions about the context of the for foreign investment's legal framework in
the overall judgment is positive. also, about the private investment law
in Afghanistan more than 47%, in the judicial system more than 53%, in the
field of land access regulations more than 58%, in the field of banking laws
more than 89% in the area of trademarks around 95%, in the field
of tax laws more than 63%, in terms of obtaining investment's license more than
89%, and in the field of regulating contracts and resolving trade disputes more
than 89% of their satisfaction has been reflected. With these statistics and considering
that in the second question, in which the legal barriers were identified among
other challenges, only about 5% of participants, namely, only one person,
considered the legal barriers as the main obstacle to the growth of foreign
investment in Afghanistan. Ultimately, it
became clear that the potential challenges in the legal framework for foreign
investment in Afghanistan could not be seen as a major concern for foreign
investors. The bigger challenges are existing in proportion to the structure of
the legal system in front of foreign investors in Afghanistan. 10.3.
HYPOTHESIS
TESTING
According to
the literature of review, it has been thought that legal challenges in the
field of foreign investment in Afghanistan are as one of the main obstacles to
the growth of foreign investment in this country, so based on these studies,
the following hypothesis was raised: “The legal
framework of foreign direct investment in Afghanistan could not attract
substantial foreign investors to bring their capital and expertise in this
country”. In general
result 80% of the experts by choosing medium, high and
very high options showed their satisfaction from the legal framework of foreign
investment in Afghanistan, and only 20% have chosen low and very low options.
65% of the foreign investors by choosing medium, high and very high options
showed their satisfaction from the legal framework of foreign investment in
Afghanistan, although 35% of them have chosen low and very low options. Also
72.24% of the domestic investors by choosing medium, high and very high options
showed their satisfaction from the legal framework of foreign investment in
Afghanistan, but 27.70% have chosen low or very low options. Figure 14: General Summary of the Participants' Satisfaction
From the FDI Legal Framework in Afghanistan As the result,
after the collecting and analysis data, my hypothesis not generally supported
by data, and therefore the hypothesis in this research is not fully confirmed. Although
the above statistics determined that the legal obstacles are not the main concern
of foreign investors to bring their capitals and expert in Afghanistan, but
there are some problems in some areas that researcher will point in the
conclusion and recommendations sections to them. 11.
CONCLUSION
AND RECOMMENDATIONS
Given the above, it can be concluded that generally
Afghanistan's laws in the field of economics and investment, on average, can
attract investors' confidence. However, the enforcement of laws on the one hand
and the provision of a sustainable and beneficial foreign investment, on the
other hand, requires that Afghanistan's government and the responsible
authorities in private sector take more effective actions. The conclusion and
recommendations from this research are presented in three axes: 11.1.
CONCLUSIONS
AND RECOMMENDATIONS IN THE FIELD OF LEGISLATION
·
The
Private investment law, laws in the areas of taxation and customs tariffs,
banking, insurance, mines and private property based on the economic
requirements of the country and the interests of the people and investors
should be reviewed. ·
The
stock market law must be formulated, and should the stock market in Afghanistan
start its activities. ·
In
order to protect private property in the area of modern infrastructure and
investment, should be approved specific law. ·
It
is required that an entity or independent agency gets established to promote
and develop foreign investment, based on the law, and socioeconomic conditions
of Afghanistan. ·
Restrictions
and oversight of money exchanges. Traders are encouraged to resolve conflicts
through formal and legal authorities. ·
A
policy to support and encourage foreign investment, especially in the areas of
public services, transportation, infrastructure, and mines, should be developed
and implemented. ·
In
order to provide better opportunities for the investors the Afghanistan
government should sign bilateral and multilateral agreements with the countries
of the region and also update the domestic law in this area. ·
The
benefits of joining Afghanistan to the World Trade Organization can be
documented and incorporated into the legal system in Afghanistan. This approach
assures the legal security of domestic and foreign investors. 11.2.
RESULTS
AND RECOMMENDATIONS TO EXECUTIVE ORGANIZATIONS
Given that the
majority of interviewees consider basic problems in law enforcement, most of
them believed main barriers do not exist in the content and the text of the
law, but they are in the law enforcement agencies ·
The
authorities will pursue the fight against corruption in the relevant
departments in earnest. Bureaucracy and corruption cannot be a factor in
attracting foreign investors. ·
The
activities of tax authorities and customs tariff agencies should be more
monitored and investigated. This approach can increase the government revenues
on one side, and on the other hand, can increase the foreign investors'
confidence in the Afghanistan tax system; ·
In
the process of land distribution to investors, should be more care taken and,
if it is possible must be reviewed the previous performance in industrial
settlements, especially the Herat Industrial Zone. ·
Public
and private agencies that are active in the provision of services to foreign
investors will increase the capacity of their employees to provide services to
foreign customers; ·
Avoiding
the government from the multiplicity of service departments in a single issue,
such as foreign investment, can provide facilities for the beneficiaries. The
establishment of an Office for Promotion and Protection of Foreign Investments
with qualifications and specific tasks is suggested here. ·
The
field of training native human resources in different fields must be considered
by Ministry of Higher education and Ministry of Labor so that investors are not
concerned about how to provide the necessary human resources. 11.3.
RECOMMENDATIONS FOR OTHER ORGANIZATIONS
War and security problems are known as a
negative factor affecting the growth of foreign investment in Afghanistan, in
this regard we need to focus on the following issues: ·
Focus
on creating and developing infrastructure and increasing access to energy; ·
Judicial
reforms should be vigorously pursued in order to increase the confidence of
foreign investors and other beneficiaries in this system; ·
The
Government of Afghanistan should eliminate the plurality of anti-corruption institutions
and by creating a strong national anti-corruption organization, increase the
people and investors’ confidence in Afghanistan government agencies. 11.4.
SUGGESTIONS
TO MORE RESEARCHES
·
Considering
that this research has generally addressed the issues and cannot clearly
underline the existing challenges and opportunities in the legal framework for
foreign investment in Afghanistan, it is suggested that more empirical research
be conducted in the below areas to identify clearly the law's challenges and opportunities:
Private investment law, the court's procedure, the effectiveness of insurance,
banking, land and tax laws. · Given that the research hypothesis was not fully supported and the participants referred to the impact of other variables, further research is recommended in the following areas: Providing security, prioritizing infrastructure, ways to reduce corruption and labor force training. SOURCES OF FUNDINGThis research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors. CONFLICT OF INTERESTThe author have declared that no competing interests exist. ACKNOWLEDGMENTNone. REFERENCES [1] August Reinnsch,
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