Reviving the Afghan economy during a time of intensifying violent conflict, declining external financial aid, and ongoing political uncertainty and dysfunction will be extremely challenging. But the country cannot wait for these entrenched problems to be addressed. While keeping expectations modest, this report proposes some targeted, near-term measures to increase confidence and stimulate the economy. Rather than engaging in politics as usual and following conventional policy prescriptions that will not work in the short run, the Afghan government and international community need to focus limited available resources on efforts that will have the highest visibility and impact on the current situation.

Summary

  • Afghanistan’s National Unity Government (NUG) needs to operate more like the unified government of a country facing a national crisis.
  • Tens of billions of dollars in Afghan private capital is being held outside the country, but the money is unlikely to be repatriated and invested effectively in Afghanistan unless confidence in the future increases, the NUG becomes more effective, and prospects for reconciliation and reduced violence improve.
  • Near-term measures to increase confidence and stimulate the economy include (1) increasing overall demand (for example, by starting some sizable infrastructure projects, regularizing informal urban settlements, and implementing selected urban income-generation and job programs); (2) shifting demand away from imports toward domestic production (through targeting spending programs disproportionately at the urban poor, increasing local procurement, and imposing moderate import tariffs on agricultural cash crops); (3) promoting export value chain development for high-value cash crops; and (4) creating fiscal space (including limited government borrowing).
  • Corruption needs to be combated strategically and selectively; too broad an approach, let alone comprehensive, would divert attention from the most important corruption problems and squander limited political capital.
  • Economic reforms and development programs that are too broad could also divert attention and resources away from a priority agenda and be counterproductive in the short run; examples include quick privatization of numerous public enterprises; efforts to quickly reduce opium poppy cultivation; expensive, long-gestation, financially unviable railway investments; excessive tax concessions to promote private investment; and the thin spreading of limited resources across numerous, small rural projects.
  • If the Afghan government takes urgent actions to revive the economy—including through greater political effectiveness—the international community must respond proactively and flexibly by funding high-level expertise to support economic management and innovative programs, front loading aid to support priority initiatives, and restructuring project portfolios to shift funding toward activities that achieve faster results.

About the Report

Despite significant progress in raising government revenue, the Afghan economy in 2014–15 suffered from its lowest economic growth since 2001, and prospects for improvement in the short run appear weak. This report puts forward some innovative, near-term measures that, combined with greater government effectiveness and potential reductions in violent conflict, could help stimulate the economy. It also highlights what should not be done, such as spreading limited resources too thin in pursuit of an excessively broad policy or development agenda.

About the Author

William Byrd is a development economist and has been following the Afghan economy closely since 2001. He is currently a senior expert at the U.S. Institute of Peace. He has published numerous reports, articles, and papers on Afghanistan’s economy, public finances, governance, corruption, political economy dimensions, drug industry, extractives sector, and development challenges.

Related Publications

Can Technology Help Afghanistan Avoid the Resource Curse?

Can Technology Help Afghanistan Avoid the Resource Curse?

Wednesday, February 13, 2019

By: William Byrd; Richard Brittan

Afghanistan’s mineral wealth, roughly estimated at upwards of $1 trillion, is sometimes seen as the country’s potential savior—with prospects to generate large government revenues, exports, and some jobs. On the other hand, international and Afghan experience amply demonstrates the downside risks associated with mineral exploitation—macroeconomic and fiscal distortions; waste, corruption, and poor governance; environmental degradation; and the risk of financing or fomenting violent conflict, thereby undermining peacebuilding. The so-called “resource curse” is not destiny, however, and some countries have managed to avoid it, though Afghanistan faces much greater challenges than most when it comes to beneficially developing its mining sector.

Economics & Environment

Youth Protest Movements in Afghanistan

Youth Protest Movements in Afghanistan

Tuesday, February 12, 2019

By: Srinjoy Bose; Nematullah Bizhan; Niamatullah Ibrahimi

The youth-led protest movements that emerged after the 2014 Afghan presidential election added a new dynamic to Afghan politics. Motivated primarily by widespread perceptions of injustice, exclusion and marginalization from governmental policymaking, and rapidly deteriorating...

Youth; Democracy & Governance

Progress in Taliban Talks, But ‘Long Way to Go’, says U.S. Envoy

Progress in Taliban Talks, But ‘Long Way to Go’, says U.S. Envoy

Monday, February 11, 2019

By: Adam Gallagher

Amid a series of positive developments in the Afghan peace process over the last year, a framework for negotiations reached between the U.S. and Taliban has renewed hope that the 17 year-old Afghan conflict could come to a close. Led by Special Representative for Afghanistan Reconciliation Zalmay Khalilzad, the U.S. has agreed in principle to a conditional withdraw of U.S. and allied troops in exchange for the Taliban pledging to not allow Afghanistan to be a safe haven for transnational terrorists, like al-Qaida, as well as agreeing to talks that include the Afghan government and a cease-fire. Despite this progress, “We are in the early stages of a protracted process,” Ambassador Khalilzad said at the U.S. Institute of Peace on February 8. “We have a long way to go.”

Mediation, Negotiation & Dialogue; Peace Processes

How can we negotiate with the Taliban? Afghan women know.

How can we negotiate with the Taliban? Afghan women know.

Thursday, February 7, 2019

By: Palwasha L. Kakar

Afghan political leaders met in Moscow this week with Taliban representatives amid new momentum in diplomatic efforts to end Afghanistan’s war. Like other recent discussions, including those between U.S. envoy Zalmay Khalilzad and Taliban representatives in Qatar, Afghan women remain almost entirely excluded. Yet mostly unnoticed amid the formal diplomacy, Afghan women at their country’s grass roots already have managed negotiations with local Taliban leaders.

Gender; Peace Processes; Religion

View All Publications