Ever since the September 11 terrorist attacks on the U.S., life at Pakistan's Karkhanai Bazaar near the border with Afghanistan hasn't been the same. Normally the market is thronged with people shopping for Japanese TVs, Chinese bicycles, and Korean household goods smuggled across the border to avoid onerous Pakistani customs duties of up to 100%. But these days, in the wake of stepped-up border controls, smugglers are leery of sneaking across. As a result, Sharif Ullah, a 19-year-old Afghan porter, has too little work and too much time to fret about the situation back home in Kabul. "People are afraid of the U.S. attacks," he says, leaning against his empty handcart. "Uncertainty is everywhere."
The uncertainty is a threat to the livelihood of tens of thousands of people like Ullah. That's because the free flow of contraband and drugs plays a critical role in the fragile, ragtag economies of Pakistan and Afghanistan. If the illicit trade is disrupted, it could ultimately determine the fate of the governments on both sides of the border. "It's hard to see how the Taliban could sustain much of a war if all economic activities are disrupted," says Barnett R. Rubin, a New York University professsor and leading authority on the region.
MILITANCY. That's good for the U.S., which wants to undermine the Taliban any way it can. Trouble is, any long-term interruption in smuggling will just "compound the problems" of Pakistani President Pervez Musharraf, says Rubin. A worsening economy could stoke Islamic militancy among the underclass and worsen an already chaotic law-and-order situation along the border. That's the last thing Musharraf needs as he contends with a populace deeply divided between pro- and anti-U.S. sentiment. Already the slowdown is spreading through Pakistan, where everything from car parts and Sony PlayStations to heroin is sold in black-market bazaars, or baras. The stealth economy is said to be worth at least $30 billion, or half Pakistan's official gross domestic product.
In Afghanistan, the underground economy plays an even larger role. In a country that for years has produced nothing more than food and opium, smuggling is an economic driver. Electronics from Dubai, cosmetics from Iran, tires from Turkmenistan, food processors from Japan--all move through Taliban-controlled Afghanistan and into Pakistan. Not only will the slowdown in smuggling put thousands of traders out of work, it could also threaten the Taliban's tenuous hold on power. The levies the Taliban imposes on smugglers and drug traffickers help it to purchase arms, run what little government exists, and most crucially, buy the loyalty of local chiefs and warlords.
Smuggling has been a feature of this trading crossroads for millennia. And it got a boost in the 1950s when landlocked Afghanistan negotiated a deal with Islamabad that allowed goods to pass from the port of Karachi through Pakistan and over the Afghan border duty-free. The pact has a fancy name: the Afghan Trade Transit Agreement (ATTA). But it merely provided a cover for smugglers. Nearly all of the goods bound for Afghanistan find their way back into Pakistan.
The scheme is called the "U-Turn." It works like this: A buyer in Afghanistan issues a letter of credit to import, say, a load of air conditioners through Karachi port (map). The appliances are then transported across the Afghan border 620 miles away. The trucks unload on the Afghan side and drive back across to Pakistan empty to wait while the air conditioners reenter Pakistan illegally, carried by camels, donkeys, or on the backs of tribesmen living along the rugged 1,550-mile border. The goods, which sell for far less than legally imported items in Pakistan, are distributed via a trucking industry largely controlled by Afghan refugees. According to the World Bank, the illegal trade amounted to $2.5 billion in 1997; about $75 million went to the Taliban.
Pakistan's government has made half-hearted attempts to crack down on the contraband. A few years ago, acting under pressure from local manufacturers, it banned the import of TVs and other electronics under the ATTA system. Smugglers simply chartered planes to fly the goods directly from Dubai into Kandahar in Afghanistan. From there they were smuggled into Pakistan through the grasping hands of the Taliban militia.
MONEY-SPINNER. Nor has Islamabad responded effectively to pleas from locally based multinationals. Lever Brothers Pakistan Ltd., for example, says it could sell 20% more Lux soap, Sunsilk shampoo, and Lipton tea if the black market were curtailed. Company Chairwoman Musharaf Hai says 20,000 tons of tea were smuggled in over the past 12 months. "If we cannot constrain or eliminate this problem, maybe we should source somewhere else," she says.
Drugs are another major money-spinner. The gangs moving heroin through Afghanistan, Pakistan, and Iran are as sophisticated as the cocaine traffickers of Colombia. Smugglers drive in convoys of Land Cruisers equipped with satellite phones and rocket launchers. And they enjoy the protection of some of the most powerful people in Pakistan; millions of dollars in kickbacks flow right to the top of the political establishment, says a former Pakistani intelligence agent. A 2000 report by the United Nations Office for Drug Control & Crime Prevention said Afghanistan accounted for more than 70% of global opium production. "Afghanistan is to Europe what Colombia is to the U.S.," says a U.S. official.
And despite the Taliban's high-profile ban on poppy cultivation last year, law enforcement agents say the religious sect has benefited from the drug trade. UNODCCP representative Bernard Frahi says the Taliban raised at least $18 million in 1999 through 10% Islamic levies, called usha, imposed on poppy farmers. How much more the Taliban took in from labs and traffickers is anyone's guess. Some even speculate that the Taliban imposed the ban on poppy farming because it feared a glut would drive down prices. Indeed, earlier this year the wholesale price of heroin soared tenfold, to $600 a kilogram (2.2 pounds), says a U.S. official.
Now, however, the Taliban's drug revenues are at risk. Not because the border is more tightly controlled--heroin is smuggled more easily than consumer durables--but because prices have fallen to $100 a kilo. In a drug den near Peshawar, Tajali, a green-eyed 16-year-old Afghan trader, says many traffickers are now dumping their stocks "because the Taliban has allowed people to grow again." Of course, by the time the poppies bloom next April, the Taliban may well be history. Some other group will appear to take its cut from the flow of drugs and contraband--and the underground economies of Pakistan and Afghanistan will thrive once again. By Frederik Balfour in Peshawar