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.

As an economically less developed countries, Afghanistan is 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. The is going to be increasingly important as the motor industry makes the transition to zero-carbon forms of transport.

A final striking fearure 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 been trying to withdraw their money from the country.

Points to discuss with a class

How would you describe the current situation of the Afghan economy?

What are the threats to Afghanistan’s economy in the short run and the long run?

What are the opportunities for Afghanistan’s economy in the short run and the long run?

How important is political stability in affecting economic performance in a country?