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Economic development

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  • Textbook/
  • Chapter 4: The Global Economy/
  • Economics real world examples and extension material /
  • Economic development

The Taliban become the new Government in Kabul

The political instability that comes with the forced takeover of a country like the situation in Afghanistan, has a ‘shock’ effect on the economy at a micro and macro level.

What are the economic consequences for Afghanistan of the Taliban coming to power?

The table below sets out some of Afghanistan’s economic indicators in 2021.

GDP Annual Growth Rate average over the last 10 years

9%

(2020 -1.93%)

Unemployment Rate

11.2%

Inflation Rate

1.56%

Balance of payment current Account (% of GDP)

-21.1%

GNI per capita PPP

$2,190

HDI

0.551

(169 out of 189 countries)

World happiness index

2.567

(153 out of 189 countries)

Gini co-efficient

29.4%

As an economically less developed country, Afghanistan is a low-income country with many poor people: 34% of the population live on an income of less than $1.90 (UN poverty line).

One striking aspect of Afghanistan’s is its dependency on foreign aid. World Bank figures show that aid represents 22% of its GNI. The new Taliban government will need to keep attracting aid if it does not want the economy to quickly deteriorate in the short run.

Corruption is a significant problem in the Afghan economy, and it has, for example, negative consequences for investment and government expenditure projects. Security is also a problem in terms of monetary costs and also the negative welfare effects it has on the population.

Afghanistan's private sector is narrow with employment concentrated in low-productivity agriculture: 60% of households get at least some income from farming. The country has a significant informal economy with illegal mining and, of course, opium production.

The country does have minerals available in substantial quantities, including copper, cobalt, coal and iron ore. One potential opportunity for the Afghan economy is lithium, a metal that is used in batteries for mobile devices and electric cars. This is going to be increasingly important as the motor industry makes the transition to zero-carbon forms of transport.

A final striking feature of Afghanistan’s economy is the employment of women. In the past decade, the percentage of the female population over 15 years of age in employment has risen. It will be interesting to see how the participation of women in the labour force changes under the Taliban.

In the short term, there is also a great deal of uncertainty about the country’s financial stability. There are signs of capital flight with individuals and businesses trying to withdraw their money from the country.

Points for discussion 

Describe Afghanistan's current situation in terms of economic development.

Afghanistan's Economic development can be looked as the improvement in the living standards of its population over time. This can be measured by its:

  • GNI per capita - $2,190
  • HDI - 0.551 (169 out of 189 countries)
  • World Happiness Index -  2.567 (153 out of 189 countries)

The data puts Afghanistan as an ELDC with significant development challenges. With a Taliban government, the country's future economic development could be even more difficult for the country. 

Discuss the threats to Afghanistan's economic development in the short run and the long run.

The threats to Afghanistan's economic development in the short run might be:

  • Political instability within the country may adversely the welfare of the population.
  • If there is a reduction in aid given to the country this could reduce support for businesses, employment and household incomes. 
  • There could be a fall in business and consumer confidence which may reduce aggregate demand and economic growth.
  • If there is an increase in corruption and parallel markets the government might collect less tax revenue for public services. 
  • A fall in labour participation rates amongst women might reduce aggregate supply.

The threats to Afghanistan's economic development in the long run might be:

  • A fall in the education of girls could reduce the skill level of the workforce which reduces the growth in potential output.
  • Internal and external investment levels might fall because of political instability which reduces the growth in the country's potential output.
  • If markets are interrupted by the Taliban government they might not operate as efficiently which increases business costs and prices. 
  • Disruptions to international trade between Afghanistan and the rest of the world might reduce the availability of imported goods and increase inflation.
  • If the government collects less tax revenue this might reduce the quality of the country's public services and infrastructure.