Challenges and Opportunities
May 2012: It has been said many times that Afghanistan is at a crossroads. This has never been truer than now. The withdrawal of most international troops by 2014 will have a profound and lasting impact on the country’s economic and development fabric. The Afghanistan in Transition report explores some of these ramifications. The decline in external assistance will have widespread repurcussions for Afghanistan’s political and economic landscape well beyond 2014.
Development progress since 2001 has been mixed. The country has recorded some major achievements such as rapid economic growth, relatively low inflation, better public financial management, and gains in basic health and education. Key social indicators, including life expectancy and maternal mortality, have improved markedly, and women are participating more in the economy. Yet in other respects, particularly governance and institution building, the country has fared less well, and many indicators have worsened in recent years.
Afghanistan remains one of the world’s least developed countries, with a per capita gross domestic product (GDP) of only $528 in 2010-11. More than a third of the population live below the poverty line, more than half are vulnerable and at serious risk of falling into poverty, and three-quarters are illiterate. Additionally, political uncertainty and insecurity could undermine Afghanistan’s transition and development prospects.
The large aid inflows that have benefited Afghanistan have also brought problems. Aid has underpinned much of the progress since 2001—including that in key services, infrastructure, and government administration—but it has also been linked to corruption, poor aid effectiveness, and weakened governance. Aid is estimated to be $15.7 billion—about the same as the size of the GDP in fiscal year 2011.
Despite the large volume of aid, most international spending “on” Afghanistan is not spent “in” Afghanistan, as it leaves the economy through imports, expatriated profits of contractors, and outward remittances. Other countries’ experience shows that the impact of large aid reductions on economic growth may be less than expected. The main issue is how to manage this change, mitigate impacts, and put aid and spending on a more sustainable path.
This first report is intended to be comprehensive, so it also discusses the broader historical and political economy context of development in the country, and how Afghanistan compares with other countries that have undergone their own transitions over the past 30 years. While many features of the Afghan story and the current challenges that Afghanistan faces are unique, other countries share different elements of that story—and may offer lessons on how to move away from violence and establish an enduring and stable transition to a better future.
The study is the product of the combined efforts of a core team led by Richard Hogg (Governance adviser) and including Claudia Nassif (senior country economist), Camilo Gomez Osorio (economist), and Andrew Beath (economist) in Kabul, and William Byrd (consultant) in Washington, DC.