We normally allocate the country reports for Cebr’s World Economic League Table in turn. I traditionally get the first country on the list which is Afghanistan. And so I’ve been writing a macro report on its economy each year for the past four years.
Over this period, the prospects for the economy have gradually deteriorated. After the West intervened in 2001 post 9/11 there was a period of economic revival, supported by inflows of capital, mainly military spending, and aid. The country only started producing GDP statistics in 2002 and its ranking in the World Economic League Table rose from 134th in 2005 to 113th in 2010. But its ascend in the ranking levelled out as corruption and civil war held the economy back. GDP in real terms rose from $8 billion in 2005 to $18 billion in 2019 so some progress was made. But even before the Taliban took over we were forecasting that reduced inflows of capital and aid would cause the country to fall back to 129th place by 2035, with GDP growth at only 4%, much slower than most of its rivals at the bottom end of the Table.
Over the past few years, the country’s ranking in the World Bank’s ease of doing business survey had dropped to 173rd position out of the 190 countries covered. The country ranks even worse for international trade, enforcing contracts, property rights and paying taxes. All of which are pretty fundamental to building up a modern economy. And GDP per capita peaked in 2012 at $641 and had fallen to $507 in 2019.
Looking ahead, it is likely that the end of US engagement will be followed by the growth of Chinese engagement. The Taliban have few friends amongst the Western powers since they have been fighting against NATO for so long. China is the obvious place to turn, especially since they share a 91 km border. The pattern of Chinese engagement is different from that of the West. There is less focus on human rights and attempts at nation building. And much more focus on mineral exploitation. On the 2019 Peking to Paris rally we saw this in Mongolia – we passed one queue of nearly a hundred identical huge lorries carrying coal and many long freight trains also crammed with minerals. The sheer scale, which is astounding, liberates many economies. The Afghans support Uighur dissidents in China, but it is likely that the Chinese will insist that this ends as the price of cooperation.
The US Geological Survey (mainly building on research by Russian engineers under Soviet occupation) estimate that there is about $1 trillion of minerals to be extracted from the country. They also suggested that Afghanistan could be ‘the Saudi Arabia of lithium’ which is used for electric car and other batteries. Moreover, the country is also home to some of the world’s largest deposits of rare earths. Our gut feel is that since there has been relatively little prospecting there could well be even more to be found. But the absolute amount is not really relevant; in the short term there is clearly enough. Apart from investment in mining and extraction, what is needed is transport to move the minerals to the markets, especially in China. And infrastructure is a Chinese speciality.
So in fact, whatever one’s view of its politics, the Afghan economy could actually benefit from the new rulers. Clearly some of their traditional views, particularly about women, will hold back growth. But it is likely that Chinese engagement will presage a period of aggressive mineral exploitation which could mean an economic acceleration. This doesn’t depend on naïve optimism about a ‘kinder, gentler Taliban’, whose own views might hinder growth but are likely to be trumped by the increased role of the Chinese.
There are two problems with this. The first is that China already has the bulk of world supplies of lithium and rare earths and adding Afghanistan to the Chinese zone of influence will strengthen their monopoly power. The second is that the trickle down effect from mineral exploitation is relatively weak compared with other economic sectors like manufacturing or tech. So many of the benefits will be concentrated in few hands. But when you start from GDP per capita of only $507, your choices are limited.
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