Introduction
It’s been two and half years since the Taliban took over Kabul. The country under their rule has shifted from democratic institutions to autocratic rule, the 2004 constitution is dissolved, millions of people face humanitarian crises, and many others are denied basic human rights including women’s rights to education and work. While active warfare is minimized, personal safety and security have diminished, the economy has tanked, and uncertainty continues to undermine investments and business confidence. The collapse of August 2021 was a political shock with far-reaching impacts.
Economic theory suggests shocks can be felt at two levels; local and/or economy-wide, and households rely on a mixture of formal and informal strategies to deal with them. Among the strategies to deal with these shocks are self-insurance via savings and consumption smoothing, and co-insurance via borrowing or unemployment benefits if you live in a welfare state (Bowels et al., 2017; The Economist, 2012). The informal co-insurance mechanism among families and friends is heavily dependent on trust and reciprocity which is built over time. In economy-wide shocks, everyone is affected, though the magnitude of the shock varies depending on the group’s predispositions to shock absorbability. For instance, urban vs rural or different tails of the income distribution.
In this essay, I will provide a brief context of the Afghan economy (macro and micro trends) before and after the Taliban took over in August 2021. Particularly in the second part, for the microeconomic performance, I will rely on results drawn from the in-person survey I have co-authored (with Dr. Omar Joya) from Kabul urban middle-class residents in July 2023. To help us understand reports and indicators surrounding the Afghan economy and the comparisons made in this essay, I see it essential to elaborate on the following two points: the urban-rural lifestyles vis-à-vis their economic shock absorbability, and the importance of ‘reference points’, particularly in the case of understanding the economic impacts of Taliban rule since 2021.
First, economic development in post-2001 Afghanistan has been unequal, it created urban pockets that were characteristically and materially distinct from the rural scene. For instance, Kabul city residents have little or no access to agricultural land, most do not own property, renting is a common practice, and more than one-third of the residents were born elsewhere in Afghanistan (ALCS, 2016/17). Household’s main source of income in this city is from paid employment, and only a small percentage is sufficiently rich with savings without a need for monthly income/dividends. The total population of the city is estimated to be 5.6 million (NSIA, 2023). In comparison, rural residents have access to agricultural land and live in a village lifestyle where family and social networks are closely maintained. They have assets in the forms of harvest, livestock, and familial networks (social capital).
Afghanistan never had unemployment benefits or any form of welfare state, absent formal and informal insurance mechanisms, previous research shows that the urban areas are affected more by the political and security shocks when compared to the rural dwellers. For instance, intensified conflict in rural areas post-2014 created large numbers of internally displaced persons (IDPs) putting additional pressure on the urban milieux, and increasing urban poverty (Joya et al, 2022). These characteristics indicate that all income groups below the middle class in Afghanistan have limited or no ability to smooth their consumption. Without savings/assets, the poor often consume what they earn on the day or the week, the middle class with limited savings could only survive a short time before falling into the poor category themselves. With that in mind, it can be argued that the urban poor and urban middle class felt an amplified effect of the political shock of 2021 compared to the rural population in Afghanistan. As I show in the second half of this essay, Kabul’s urban middle class is barely surviving the crisis.
Second, reference points and reference dependency are key concepts in economics, suggesting that people evaluate outcomes and express preferences relative to an existing reference point (Kahneman and Tversky, 1979). These pre-existing markers limit and bind our perceptions of good, bad, loss, or gain. Therefore, upon assessing the Taliban’s economic performance, to the very least, we have three options: (1) compare them to the Republic (2001-2021), (2) compare them against the first Taliban rule (1994-2001) or (3) compare them against a second country of similar size and composition. An invalid reference point is to compare the Taliban’s current performances to themselves starting from August 2021. This seems to be a deliberate choice in several recent reputable surveys, for instance, the World Bank’s Afghanistan Economic Monitoring monthly series (World Bank, 2023). This approach carries several risks including compromising democratic institutions/principles, normalizing the abnormal, and setting the bar too low. While these surveys are impressive sources of data and information, however, adopting an invalid reference point is often than not misleading or presents a distorted version of the reality. The merits do not justify the risks, as this approach in the context of Afghanistan completely ignores the new political economy and the importance of democratic institutions for prosperity and development. Well-established research shows that democratically elected regimes perform economically better than their autocratic counterparts in the medium to long term (Acemoglu, 2019; Acemoglu et al., 2005).
The wider context of Afghanistan 2001-2021
The US intervention of 2001 was hailed by many as freedom from the oppressive rule and an impoverished autocracy. Before this, the Taliban had imposed a strict Islamic code of conduct including a total ban on music, television, girls’ education, and school curriculum focused on religious education instead of sciences (Matinuddin, 1999). More importantly, they marginalized other ethnic groups from power, and political/public life, and prosecuted Shias (Drumbl, 2002). The Western intervention accompanied extensive economic and human development (education and health), infrastructure, free press, and much more. Massive amounts of foreign aid (incl. civilian and security) were poured into Afghanistan (totaling $160 billion) (World Bank, 2019).
The re-emergence of the Taliban and their effective re-mobilization against the Republic and US/NATO forces had several reasons: the cost-effectiveness of the intervention, donor fatigue, highly dependent and corrupt Republic, mischaracterization of the nature of the insurgency, and the gulf of disconnect between the elite in Kabul and the reality of the rest of the country were among the many reasons leading to the demise of the republic.2 This was against the backdrop of rising Afghan grievances (religious, tribal, personal, etc) against foreign troops’ presence and their impunity from the law (for a summary of how this manifested itself into full-blown violence see, Joya and Rahimi, 2022).
The US-Taliban negotiations in Doha bypassed the Republic which resulted in a ‘peace agreement’ in 2020, and in May 2021, the US withdrew their troops from Afghanistan completely. Three months later, in August of the same year, the Republic itself collapsed. This political crisis aggravated the political and development course of the country. In the words of Mark Twain, ‘History doesn’t repeat itself, but it often rhymes.’ The Republic was propped in 2001 by the US and NATO after toppling the very Taliban regime as part of the ‘war on terror’ after the 9/11 events (for a comprehensive summary and lessons learned, see SIGAR report, 2021).
While the Afghan economy under the Republic experienced average growth rates of 9.6% between 2003 and 2013 and less than 2% thereafter, the development picture was mixed. The high growth rates and massive amounts of aid failed to be pro-poor and the urban-rural economic disparity continued to rise (Joya et al, 2022). Figure 1 shows increasing poverty rates and GDP growth rates, while population growth remains steady between 2007 and 2020.
Macroeconomic trends before and after the Taliban
Two years after the Taliban takeover, the GDP has contracted significantly, with an estimate of -20.7% in 2021 and -6.2% in 2022 (Figure 2). In nominal terms, the GDP has contracted over $5 billion in value, falling to $15 billion in under 10 months. GDP per capita has fallen by an average of 50% between 2020 and 2021 and continues to remain low in 2023 (World Bank, 2023).
Inflation has been volatile, reaching heights of 18% in 2022 and then the economy experienced a deflation of -9.1% in 2023 (Figure 3). High volatility is not good for business confidence, firms cannot anticipate their costs and market prices. In the case of Afghanistan, the likely cause of the deflation is the falling aggregate demand and disrupted labor markets.
Kabul under the Taliban Rule
The analysis and data presented in this section are part of a larger survey conducted with primary data collection to assess the socioeconomics of Kabul’s middle class under Taliban rule by Rahimi and Joya (2023, December). To reiterate, atomic lifestyles, lack of access to formal and informal insurance mechanisms to protect themselves against economic shocks, and disruptions to the labor market left Kabul residents at the center of the shock in 2021.
Household spending across food and non-food items among the sample is “substantially less” in July 2023 compared to July 2021. Household (HH) appliances and spending on clothes witnessed the sharpest decline. Spending on communication did not fall as much as other categories, which forms a small proportion of the total household spending (Figure 4). We asked participants if they had family overseas, 47% reported they have at least one or more family members outside, of which over 50% of them left after August 2021. To stay in touch with family members abroad perhaps explains the spending pattern on communication.
In July 2021 only 30% of households stated having some form of debt, after two years in July 2023, this has increased to 67% (Figure 5). One way to look at this is through the ‘wealth effect’, this theory suggests that consumers feel less secure financially, they feel poorer, compounded with reduced/lost income/salary, this effect is further magnified, leading to significant reductions in aggregate demand.
Over 90% of the participants in the survey stated that they had not purchased any real assets or made investments (Figure 8). This in effect means the level of investments has diminished down to zero. This result is corroborated by the observed falling property/asset prices in Kabul.
Conclusion
Afghanistan is grappling with two years of protracted period of Taliban rule, resulting in a poor state characterized by restricted opportunities and disenfranchisement, particularly affecting women who are deprived of access to education and employment. This exclusion constitutes a significant impediment to the nation’s socioeconomic progress, given that nearly half of the labour force is precluded from contributing to the economy. The dearth of incentives for talent and innovation has further exacerbated the situation, leading to a substantial loss of human capital and expertise accrued over the past two decades due to widespread migration.
Afghanistan no longer has the allure of professional growth or the promise of a good standard of living for skilled laborers. The prevailing trend reveals an exodus of such individuals, leading to drain the country’s human resources, a pre-requisite for long-term economic progress.
The economic landscape, as elucidated in this article, is marked by high volatility, a decline in aggregate demand, and diminishing business confidence. A comparative analysis over the past two years exposes a palpable deterioration in the socioeconomic status of the middle class in Kabul too. Kabul residents find themselves grappling with heightened negative impacts of the political crisis with no formal or informal insurance mechanisms to protect them, impoverished, struggling to meet essential expenditures, and experiencing high levels of debt. These multifaceted challenges underscore the impact of the Taliban takeover and the lack of fiscal and monetary interventions to address the economic needs of the people.
References
Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Institutions as a fundamental cause of long-run growth. In P. Aghion & S. N. Durlauf (Eds.), Handbook of economic growth (Vol. 1 (A), pp. 385–472) Elsevier. https://doi.org/10.1016/S1574-0684(05)01006-3.
Acemoglu, D., Naidu, S., Restrepo P., & Robinson, J. A. (2019, February). Democracy does cause growth. Journal of Political Economy 127 (1), 47–100. https://doi.org/10.1086/700936.
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Joya, O., & Rahimi, L. (2023). A theory of religious grievance: Understanding the conflict in Afghanistan. Politics and Religion Journal 17 (1), pp. 161–179. https://doi.org/10.54561/prj1701161.
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About the Author: Dr. Lutfi Rahimi is Head of Research at Biruni Institute, an Afghan think tank, [email protected].
1- The full report can be accessed here: https://biruni.af/2024/01/01/surviving-the-crisis-a-socioeconomic-assessment-of-the-middle-class-in-kabul/. This is a survey of almost 300 professionals in Kabul two years after the Taliban takeover, and interviews with another 24 to understand their economic and other experiences after the collapse.
2- For a more comprehensive survey of the literature on the collapse of the Republic from Afghan scholars/voices, see the collection of articles published from a joint AIAS-USIP conference: https://afghan-institute.org/aias-usip/.