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The Afghanistan Crisis Part 1: Economic Ramifications

August 29, 2021
Editor(s): Thomas Sinclair
Writer(s): Kaiyue Chen, Luke Chen, Haiyue Ma

The former Secretary-General of the United Nations, Ban Ki-Moon, once said that ‘migration is an expression of the human aspiration for dignity, safety, and a better future.’ Few events in living memory echo this sentiment as harrowingly as the recent video footage of people falling to their deaths from planes leaving Afghanistan – desperate to escape their oppression under the new Taliban government. 

For those who remain, the current economic prospects of the country, dire as they may be, would be an issue of significant interest and importance. While Afghanistan rightly maintains its nickname as the ‘graveyard of empires, its interaction with powerful outside influences does not end. Indeed, China seeks a politically stable Afghanistan for economic purposes – the country is part of China’s ‘Belt and Road Initiative’ and harbours a wealth of natural resources.

While the US openly aspires toward liberal ideals, China is coldly pragmatic; given China’s willingness to sustain the Kim regime in North Korea, they will have no qualms about the incivility of the Taliban. But a necessary condition of domestic stability is the development of domestic industries and supply chains. Currently, prospects in this area look grim: twenty years of nation-building efforts by the US failed to connect even the country’s two largest cities – Kabul and Kandahar – with a paved road.  Therefore, there remains little cause for optimism that Afghanistan will make an economic comeback, but time will tell.


The current state of Afghanistan’s economic position.


Since 2002, the US has spent around $143 billion on reconstruction activities in Afghanistan. More than 50% was spent on enforcing Afghan security forces. Nearly $36bn has been allocated for governance and development, while smaller amounts were also allocated for anti-drug efforts and humanitarian aids. The Afghan construction sector and relevant services had been largely driven by US military contracts, accounting for 40% of GDP. However, energy, infrastructure, and natural resources are now more in jeopardy than since 2001, the year the US chased out the Taliban regime. As the US withdrew 60,000 soldiers in 2015, a substantial number of businesses in key industries deserted with the Americans. According to a January report, at least 100,000 jobs were lost in the transport sector alone, which constituted 22% of Afghanistan’s GDP . These economic consequences will undoubtedly be amplified after the US’s complete withdrawal from the region, potentially crippling the country’s economic development. 

In Afghanistan, agriculture is the main source of income for roughly 75 percent of the Afghan population, and the country’s main export. Afghanistan exports to India and Pakistan a bulk of exports including dried fruits, nuts and medicinal herbs. On 18th August 2021, the Taliban stopped imports and exports through Pakistan’s routes, which effectively stopped the exports to India. India, one of the largest partners of Afghanistan, exported goods worth $835 million and imported around $510 million materials from Afghanistan this year. As 85% of India’s dried fruits are imported from Afghanistan, the interruption of the trade may cause a shortage in India’s dry fruit market and the prices may soar, which in turn could put traders and consumers in a vulnerable situation. Businesses might look for other alternative sources of supply, which could cause a large economic loss for Afghanistan even if the trade resumes in the future.

Geographically, Afghanistan is a landlocked country which heavily relies on air routes to export its goods, which during this tumult has been heavily disrupted. Private players are likely to deal through surrogate countries to export to Afghanistan, but it all depends on how the situation evolves. The stop of trade through Pakistan’s routes worsens the situation, which causes significant economic loss and negatively influences people’s consumption options as Afghan imports a great amount of coffee, tea, medicines and sugar each year. Observers predict that with the Taliban in control, international trade will come to a standstill, driving to a surge in smuggling.  There were some signs in July, when the Afghanistan government’s customs revenue fell by 30% that month to $57.5 million.

The future of some existing infrastructure projects remains precarious. For example, the CASA-1000 project that involves a new high-voltage electricity transmission system that helps transmit excess hydropower from energy-rich countries like Kyrgyz Republic and Tajikistan to energy-poor countries like Afghanistan and Pakistan. It encourages economic growth and facilitates the trade of electricity. However, with the Taliban in control, it is hard to predict any changes about the initiative since this project relates to multilateral agreements and trust between countries, while no country recognises the Taliban so far. But as IMF blocks Afghanistan from getting reserve funds, the sources of project funding remain uncertain. It is predicted that the project may be disrupted and in turn influences accessibility and affordability of electricity and people’s living quality.

CASA-1000 project

The other ongoing infrastructure project of note is the Uzbekistan-Afghanistan-Pakistan Railway, which aims at helping to open Pakistani seaports on the Arabian Gulf to Uzbekistan – to continue Afghanistan’s gradual integration into the Central Asian economic system. It is reported that the Taliban has shown an interest in engaging regionally. The Taliban held talks with Turkmenistan early this year over energy supply to Taliban-held areas of Afghanistan and security of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline. There could be hope for the safety and viability of the complex, long-term railway project, though in practice, the difficulty in acquiring funding and unsettled relationships between the Taliban government and other countries can again lead to many uncertainties.


China poised to take advantage.


China’s Foreign Minister Wang Yi meets with Taliban political chief Mullah Abdul Ghani Barader

Since the American evacuation, China has signalled their acceptance of the Taliban as a legitimate military and governmental entity. With US-funded infrastructure now at the Taliban’s disposal, it is an opportune moment for strategic competitors such as Beijing to re-engage their lucrative development projects to boost its regional ambitions in the Middle East. The Taliban has been warm to this reception, inviting China to involve itself in Afghanistan’s economic development.

For example, China is likely to take full advantage of Afghanistan’s vast lithium reserves in provinces such as Ghazni, Herat, and Nimroz. Lithium is a crucial component in building lithium-ion batteries and thus electric vehicles; according to Bloomberg New Energy Finance Limited report in 2020, China leads the world’s lithium-ion battery supply chain market. The production of electric transportation solutions is not only significant to its economic developmental goals (reference) but would also decrease its market dependence for key tech components on exports. China’s access to massive quantities of untapped lithium deposits would deal a significant blow to its competitors in the US and Europe for electric battery resources.

Further, China holds a substantial interest in Afghanistan’s vast rare mineral resources. Afghanistan contains an estimated 1.4 million tons of rare earth elements (REEs) such as copper and gold, which are crucial for producing renewable energy technology. As the leader of global REE supply chains, China controls 90% of the processing capacity of these rare minerals. Naturally, China will likely become a primary financier to mining extraction via royalties and taxes to expedite projects as it did in Central Africa for oil extraction.

Additionally, the American exit unlocks a strategic chokepoint in China’s Belt and Road Initiative (BRI) expansion. Amongst the numerous BRI projects that are in operation in the surrounding region, the China-Pakistan Economic Corridor (CPEC) is most significant.  Indeed, the CPEC provides access to the Arabian Sea, and enhances trade prospects with the Middle East, Africa and Europe. Most significantly, the CPEC crosses the Wakhan Corridor linking China’s restive Xinjiang province with Afghanistan’s Badakshan province. Nesting between the Taliban-controlled Afghanistan and the volatile regions of Xinjiang, the Wakhan Corridor is crucial for the security and viability of the China-Pakistan Economic Corridor (CPEC). According to the Lowy Institute, it “marks the entry point for CPEC into China.” Hence, the American exit provides ample opportunities for China to asset its geo-economic presence in the region.


Where to from here?


Afghan Girls robotics team

Last week, the BBC reported that an Afghan all-girls robotics team, which won a special award at a competition in the US, had fled to Qatar. For many, these girls serve as a reminder that Afghanistan has as much potential as any other society. But, we also need to examine the situation closely to understand why Afghanistan is economically unsuccessful and why many are still, if not more, pessimistic in this regard. Consider that women are now discouraged from leaving their homes – forced to leave the workforce – because the soldiers of the new regime are “not trained” to respect them.

Furthermore, the tall mountains and rugged terrain make the country a hard place to administer for local governments and foreign occupiers alike. Its crucial infrastructure is mostly either underdeveloped or in substantial disrepair. And their new benefactor and geopolitical partner: China, does not act out of altruism and does not have Afghanistan’s best interests at heart. The current situation is reminiscent of the old maxim: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” Given that twenty years of US nation-building efforts have failed, the Afghan people need to restart the process of ‘learning to fish’ if they wish to reverse their fortunes.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Thomas Sinclair
Editor
Kaiyue Chen
Writer
Luke Chen
Writer

I am a second-year Bachelor of Commerce student majoring in economics and finance and work part-time as a maths tutor. My interests include history, geopolitics, as well as both micro and macroeconomics. I hope to make substantive contributions to the publication and expand my intellectual horizons while working alongside my fellow writers.

Haiyue Ma
Writer

I’m a first year Commerce student majoring in Finance and Economics. My primary interests are developing markets, macroeconomics and financial crime. As a writer at Cainz, I aim to use an interdisciplinary approach in addressing today’s pressing economic and financial issues.