Afghanistan: Learning from a decade of progress and loss

In Afghanistan, the past decade saw remarkable progress, as well as reversals and lost opportunities .

The overall macroeconomic and security context in Afghanistan since 2007 can be broken into two distinct phases, pre- and post- the 2014 security transition, when international troops handed over security responsibilities to the Afghan National Security Forces (ANSF).
 
The pre-transition phase was marked by higher economic growth (GDP per capita grew 63 percent relative to its 2007 value) and a relatively stable security situation.

Since 2014, growth has stagnated, falling below rates of population growth, and the security situation continues to deteriorate . With the withdrawal of most international troops and the steady decline in aid (both security and civilian aid) since 2012, the economy witnessed an enormous shock to demand, from which it is still struggling to recover.

Similarly, welfare can be characterized into two distinct phases.

Despite high economic growth and a relatively stable security situation during the pre-transition phase, the period was a lost opportunity for poverty reduction as growth did not benefit the poor. Despite some progress during this period, especially on human development, challenges – the lack of productive employment, illiteracy and low levels of education, and huge demographic pressures – remained pervasive.

Welfare deteriorated between 2007 and 2011 as growth was not pro-poor. During the post-transition phase, Afghanistan experienced a sharp increase in poverty, from 38 percent in 2011 to 55 percent in 2016; almost 16 million Afghans are poor in 2016, an increase of 5 million compared to 2011 .

A vast majority of Afghans have not reaped the benefits of growth

The welfare of the bottom 80 percent of the population appears to be relatively unresponsive to trends in economic growth, which have been driven by services growth, with real per capita expenditures in steady decline over the last decade. During the high growth years, only the richest 20 percent of the population experienced improvements in welfare, as did Afghans living in urban areas and in some regions .

Between 2007 and 2011, poverty among urban Afghans fell at a rate of 2 percent per year on average .  Afghans living in the Central, East, and North regions were also able to gain from these boom years; poverty rates decreased between 2007 and 2011 at a rate of 3 percent per year on average.

Since the security transition, everyone lost, from the poorest to the most well-off.

Yet, those who gained during the pre-transition years had the most substantial losses as gains in welfare, likely a result of international security and aid-related jobs and incomes declined sharply between 2011 and 2016.

Similarly, the post-transition period hit urban areas particularly hard with increases in poverty at a rate of 10 percent compared to increases in poverty in rural areas of 8 percent.

The winning regions during the boom period—the Central, East, and North regions—were the biggest losers during the slowdown, with increases in poverty of 10 percent per year, compared to 6 percent in the remaining regions.

Looking ahead: The economic pie must grow and benefit everyone

The currently high poverty rates represent the combined effect of stagnating economic growth, increasing demographic pressures, and a deteriorating security situation in the context of an already impoverished economy and society where human capital and livelihoods have eroded during decades of conflict and instability.

More troubling, growth has not been inclusive, leaving large parts of the country and the population untouched. Growth in Afghanistan so far seems to be elastic only to welfare for the top 20 percent of the distribution , whose consumption increases and falls with GDP per capita.

During the former period, growth was primarily driven by services and characterized by highly volatile agricultural growth (Figure 1).

Figure 1: Contribution to GDP growth, by sector, 2007-16

The services-led economic growth between 2007 and 2012 was not pro-poor: for every 1 percent increase in GDP per capita, poverty increased by 0.2 percent during this period.

Since the security transition, while services were the only driver of growth, its rates of growth slowed to 1 percent per annum, with other sectors of the economy essentially at a standstill.

Consequently, between 2012 and 2016, each one percentage point decline in GDP per capita was accompanied by a 6.5 percent increase in poverty . During the last decade as a whole, on average, each percent increase in growth has been matched by an equal percentage increase in poverty  (Figure 2).

If a similar trend of inequitable sharing of growth across the distribution continues, future growth will not translate into poverty reduction.

Figure 2: Trends in poverty and GDP per capita, 2007-16

Looking forward, we must not only grow the pie but, we must also grow it in ways that are more equitable. This means investing in sectors that can generate employment and incomes across the country, particularly for the poorest Afghans.

Great commitment is thus required to ensure growth becomes pro-poor by implementing policies that will improve consumption of the bottom 50 percent to a larger extent than at the top. Development efforts need to thus focus on the bottom 50 in all programming, develop a spatially differentiated approach, and invest in cities as well as the private sector .

Afghanistan has one of the largest youth bulges in the world—nearly two thirds of Afghanistan’s population is below the age of 25 and half below the age of 15 .

Young Afghans have a huge untapped potential and can present a large pool of human capital which if used productively can lead to growth and prosperity . A higher number of Afghans in employment can make the country more equitable and stable.

Agriculture directly employs almost half of all the employed poor (48 percent) and 42 percent of the employed population . Agriculture must grow to revitalize the sector for economic growth, job creation, and food security. Investments are needed in the diversification toward high-value crops, irrigated wheat, horticultural crops and intensive livestock production as well as linking farmers to markets .

An improvement in the security situation and the right signals from the government and the international community will provide opportunities for broad-based, less aid-dependent growth that takes advantage of Afghanistan’s natural endowments and strategic location.

A smooth political transition and greater peace and security is a precondition to put Afghanistan on a path of shared prosperity .