The Economic Roots of the Afghan Debacle

When foreign aid becomes a country’s dominant source of income, it fosters so much rent-seeking and corruption that the population might ultimately prefer a new – or old – regime. A column by Daniel Gros.

Daniel Gros
«Afghanistan’s economy produces barely enough food to meet its own needs, and has virtually no domestic manufacturing. All domestic consumption of industrial goods thus relies on imports.»

Nation-building has manifestly failed in Afghanistan. MIT’s Daron Acemoglu has elucidated an important reason why: the West took a top-down approach to establishing state institutions, even though Afghanistan is a «deeply heterogeneous society organized around local customs and norms.» But economic factors also played a key role.

Afghanistan is desperately poor, with a per capita income of about $500 (in current dollars) – one-hundredth that of the United States. The real problem, however, is not Afghanistan’s income level, but rather its rate of change. The literature on revolutions and civil unrest suggests that high growth stabilizes a country’s politics, irrespective of whether the country is rich or poor (or whether it is democratic).

In other words, rapid growth helps plaster over conflicts. But it also creates expectations of continuing improvements in living conditions. If these expectations are not fulfilled – say, because growth slows or reverses – unrest becomes likely.

Deeply imbalanced

Afghanistan fits this pattern. The country experienced rapid growth until about 2011-12, when stagnation set in. But, to understand the scale of this reversal and its impact on living standards, one must look beyond traditional economic indicators like GDP to imports and energy consumption.

This is because Afghanistan’s economy is deeply imbalanced. It produces barely enough food to meet its own needs, and has virtually no domestic manufacturing. All domestic consumption (of industrial goods) thus relies on imports, which are financed almost exclusively by foreign transfers (and possibly by the heroin trade, which does not appear in the official statistics).

Imports represent an expenditure, not value added or GDP. The «value added» that appears in GDP statistics is created when traders or «bazaari» re-sell imports – say, a shipment of oil or cellphones – at a higher price than they paid. If the price has been artificially inflated, GDP will reflect corruption more than true economic value added, even though the imported goods remain useful for the consumer. In this context, imports are the best – or, rather, least imperfect – available metric of domestic consumption.

Declining standards of living

On this account, Afghanistan experienced an extraordinary boom in the decade after the fall of the first Taliban regime in 2001, with imports increasing nearly tenfold. But, since 2011-12, import growth has stagnated, even as the population has continued to grow. This implies declining standards of living – and rising discontent.

Energy consumption paints a similar picture. Access to electricity has soared over the last 20 years, from 20% (meaning rural areas had no electricity at all) in 2001 to over 95% now. But growth has stagnated in recent years. To be sure, at close to 100%, little further improvement is possible. But there is another problem: most of Afghanistan’s electric power (about four-fifths of total electricity consumption) is imported. This implies that neighboring countries (mainly Uzbekistan) have leverage over the country’s new government.

Continuously increasing transfers can placate the local population. But the US was not willing to keep increasing funds to sustain the necessary levels of consumption in Afghanistan. Civilian expenditure amounted to only a small fraction of military spending. And even so, it could not continue to increase forever.

China might fill the gap

For the new regime, maintaining the flow of imports will be vital. Some have speculated that this will give the US some leverage, as it could refuse to continue disbursing aid. Yet, while the sums involved are substantial – the country needs about $10 billion per year – other global powers could easily afford them.

For China, throwing Afghanistan a lifeline would cost a negligible fraction of its reserves. Even Russia or Saudi Arabia could afford to chip in on a meaningful scale. These donors are unlikely to care about, say, maintaining access to education and jobs for girls and women. Given this, the ability of the US – or western financial institutions like the International Monetary Fund – to influence Afghanistan’s Taliban-controlled government might be severely limited.

Of course, Afghanistan is not the only country where such dynamics are at work. China’s growing footprint in many parts of Africa, for example, has made linking financial aid to human rights far more difficult there, too. This highlights the increasing difficulty of advancing «Western values» in a world populated by deep-pocketed non-Western rivals.

Maintaining low corruption is impossible

Observers agree that endemic corruption played a major role in the fall of the Afghan government. This has led many to argue that the Taliban would not have managed to regain control of the country if the US had stamped out corruption.

But this might be a chimera. When a country does not produce anything itself, and almost all of the resources available to its consumers arrive as transfers from abroad, maintaining low corruption becomes almost impossible. There are very few countries in Afghanistan’s position that break this mold.

Clashing priorities

One way to avoid or minimize endemic corruption could have been to allow NGOs to distribute more foreign aid. But their priorities – gender balance and green growth – would have clashed with those of the dominant local power brokers, creating other political problems.

Building a self-sustaining economy is as difficult as building state institutions. Foreign aid can finance some infrastructure and sustain the population’s standard of living. But when aid becomes a country’s dominant source of income, it fosters so much rent-seeking and corruption that the population benefits little, and might ultimately prefer a new – or old – regime.

Copyright: Project Syndicate.