Afghanistan’s Economic Development (2001-2021) and Lessons Learnt

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Event Report

Afghanistan’s Economic Development and Lessons Learnt (2001-2021)

May 25, 2022

The talk was about the macroeconomic and development overview of Afghanistan from 2001 to 2021 by Professor Omar Joya and professor Lufti Rahimi.  The professors talk about the economic performance and development challenges that existed in Afghanistan in the past two decades. The talk mostly focuses on growth performance, financing gap, poverty, and the political economy of development in Afghanistan. To understand the situation better the professor gives us some historical context that has a significant effect on the outcome in Afghanistan.

After the United States and NATO dismantled the Taliban, they maintained a security presence in Afghanistan. During the Obama administration, there was a massive troop surge in Afghanistan reaching its peak in 2011. However, the Obama administration decided to withdraw troops during the 2012-2014 period and all security responsibilities were handed over to Afghan National Security Forces. During these two decades, on average 85 percent of total public spending was financed by foreign aid. The aid supported extensive economic development from human development to infrastructure, governance, civil society, human rights, and so on. In 2021, however, the United States signed a peace agreement with the Taliban which eventually led to political collapse.

The professor uses two cutoff points as a reference to explain the growth performance 1) Start of Security Transition and 2) End of Security Transition. The period before, during, and after the transition has been used to explain developmental aspects of Afghanistan’s society. From 2003 until the start of the security transition the economic growth was highly volatile, however, the average economic growth was significant, about 9.5 percent in terms of real GDP growth and it was unmatched in Central and South Asia. Given the huge size of the agricultural sector in Afghanistan, the volatility in economic growth was mostly driven by volatility in the Agri-sector due to poor irrigation systems and harsh climatic conditions. Once the security transition was complete, the economic growth declined drastically. The decision to withdraw the U.S. and NATO troops created panic among people and reminded them of the Soviet withdrawal in 1989 after which a civil war broke out in Afghanistan. Investment dropped and entrepreneurs suspended their projects, and people stopped paying taxes which further exacerbated the situation. From 2012 to 2014 there was a fiscal shock, revenue dropped and in 2014 there was a huge fiscal gap forcing the government to reduce expenditures and mobilize additional resources. After the transition growth remained very low, around 2.5 percent on average due to increased conflict and security challenges. Covid-19 and the Taliban taking over power further pushed the country into an economic recession. During the period between 2002 and 2020, there was huge progress in key human development and socio-economic indicators like GDP per capita, secondary school enrollment, maternal mortality rate, access to electricity, and mobile cellular subscription. However, despite massive aid, there was a paradoxical situation in poverty reduction. Poverty in fact increased during this period.

The most important challenge was the financing gap in the country. A lot of foreign aid was spent off-budget, meaning they were directly spent and executed by the donor through NGOs and INGOs and the government did not have any discretion either in planning or execution of that aid money. On-budget i.e., operational, and developmental budget was also extensively financed by foreign aid. After the security transition, foreign aid started to decline especially in off-budget funds. Though Afghanistan received massive financial aid to the tune of 160 billion U.S. dollars, it was not able to improve the fiscal sustainability of the country and poverty failed to decline. Between 2007 and 2016, poverty increased despite huge economic growth and significant foreign aid flows. However, poverty declined between 2016 and 2020, when economic growth fell, foreign aid declined, and the conflict intensified. Moreover, poverty tended to be lower in provinces with higher levels of conflict. This dichotomy could be attributed to the separation of developmental aid and military aid packages just before the transition. The provinces which had conflict received more military aid packages and this could have led to poverty reduction.

During these two decades, growth failed to be pro-poor, and the urban and rural divides widened. In the Human Development Index, Gender Development Index, Gender Inequality Index, Multidimensional Index, and Corruption Perception Index, Afghanistan was performing worse than most of the South Asian countries. Lack of security, low level of human capital, and conflict in aligning donor interest with the government were some of the reasons attributed to the lack of multidimensional development in Afghanistan. With the unprecedented level of attention that Afghanistan received, the expectation was of multidimensional development in this period. However, the failure to understand the gravity of this level of attention which is both financial and technical that Afghanistan received can be attributed to domestic factors and international arrangements and methods that created antagonism within Afghanistan as they were not understanding the contextual reasons.

One of the significant aspects of Afghanistan’s economic development was aid. The aid was spent on-budget or off-budget. The method of delivery of aid was consistently a matter of debate between the government, international donors, and national institutions Government wanted on-budget as they believed it would bring greater efficiency, enhance economic multiplier, and better align donor and government priorities, and reinforce government legitimacy. The success of the National Health Program, National Agricultural Program, and Citizen Charter was used to further this narrative. This argument was further solidified by World Bank analysis which showed that the proportion of each U.S. dollar that reached Afghanistan through on-budget assistance was much higher than off-budget assistance. Despite this between 2008 and 2019 the percentage of on-budget financing increased only from 10% to 32%, and off-budget remained the biggest way of spending aid.

The other aspect of aid we need to understand is the issue of conditionality. Aid was given under several conditions, and it mandated the government to fully deliver them. Detailed frameworks were developed, and targets were set out to be accomplished every year. As a result of this, a complex bureaucracy was set up to implement, monitor, and update the progress of the objectives. The process was messy, created backlogs of work, delayed developmental projects, created corruption, etc. The most prominent effect of conditionality was the crowding-out effect of conditionality. The bureaucracy was mostly concerned with meeting the targets on the paper for the money to be released for the next work which affected service delivery and created cumbersome administrative work. Another dimension of aid was its unpredictability of aid. At the end of the 4-year period, the government would wait for the pledging conference to go smoothly and for other countries to promise enough money. The problem it created was that the long-term vision was sacrificed, and aid-dependent development became unsustainable.

The other problem was policy failure and corruption. Fragility such as security threat from organized non-state actors, government lacking legitimacy in the eye of many citizens, weak capacity of the state in essential functions, environment not conducive to private investment, a deep division within society, and economy exposed to shocks with little resilience were mostly ignored in policy decisions. Development interventions in fragile states need to consider the sources and drivers of fragility. Historical, Social, religious, ethnic, psychological grievances need to be addressed. Religious discourse or tools were used by radical groups to legitimize their fight. The importance of this soft power or tool was ignored throughout the course of development. So, for these public interventions to bring up modern governance system, and democratic ideals, they must accept the contextual rigidities that come within each country. Exclusionary development policy in a highly religious society that has its own narrative and history, and diverse groups of people does not work. Endemic corruption was another problem, and it reinforced the perception of injustice. Law and order and judiciary must function for democracy to flourish which never happened.

To conclude, before the transition began economic growth was high and Afghanistan made huge improvements in many development indicators. NATO force withdrawal and security transition in the hands of the Afghan National Army impacted the economic growth during and post-transition period, as it pushed the country towards conflict and political instability. Poverty however was high and off-budget financing could be the reason why poverty did not decline despite massive foreign aid before the transition. Post-transition aid declined, and Covid-19 and the Taliban’s takeover of the reins made the matter worse. Policy failure at the government level and corruption led to a trust deficit between the state and its citizens. Trust deficit, failure to deliver services, the ineffectiveness of state and non-state institutions negatively affected state legitimacy, and the exclusionary centralized political system led to a lack of economic development in Afghanistan for two decades from 2001 to 2021.

Prepared by  Avinash Kumar Singh, NIICE Intern