Short to Medium Term Economic Prospects

The transitional government's control of the internal security situation is still tenuous in many regions outside Kabul, which hosts about 4,500 personnel of the International Security Assistance Force (ISAF) that is now led by NATO. The influence of local Afghan commanders is still dominant in many parts of the country. It is recognized at home and abroad that security and stability will remain problematic as long as local commanders retain their own armed forces. Remnants of Taliban and Al Qaeda still seem to be very much operational, as terrorist bombs have claimed many innocent civilian lives in Kabul, Kandahar, Jalalabad and elsewhere. Efforts are under way to establish the rule of law, bring provincial and local authorities under central control, build a national army and a police force and extend the tenure and expand the role of the ISAF.⁵⁶ The improvement of security conditions in much of the county is a prerequisite for effective reconstruction and inevitably for a sustained economic performance.

Collier and Hoeffler (2002) find that super-normal economic growth tends to be seen in post-conflict countries. This follows an inverted-U pattern and is typically at peak levels from the fourth to the seventh year of peace. Hence after the initial several years, a period of catch-up growth can be expected, which dissipates over time as the economy reverts to some longer-term growth rate. The delayed onset of relatively high economic growth after the conflict probably reflects the time it takes for business and investor confidence to be restored and for the institutional and infrastructural base of the economy to be rebuilt.

In the case of Afghanistan, there may be decent prospects for a strong economic recovery even in the short run, provided that certain preconditions on security, the government's continued commitment to sound economic management, and continued donor support are met. There are positive factors to contribute to a strong recovery. First, following a long war, a sharp rebound can be expected once investments start to flow in. In this regard, a new investment law has been adopted and the Afghan Investment Support Agency was opened in August 2003. Second, while the return of large numbers of Afghan refugees puts an added burden on the urban infrastructure and environment, they bring with them essential skills and entrepreneurship. Third, reconstruction activities will generate substantial demand and provide business opportunities.⁵⁷ As seen in the previous section, FY2002/03 has seen a strong rebound at a very high estimated real growth rate. If the above preconditions are met, economic growth in the period 2003-2005 could be above 10 percent.

However, it is very difficult at this stage to predict with any degree of confidence what the macroeconomic picture will look like in the medium run, especially given the uncertainties over many noneconomic factors such as security, institutional capacity and overall governance of the central and local authorities. Projecting economic performance for any further than the next few years would require simulations under scenarios with varied assumptions on key parameters. The following scenario simulations should therefore be taken as only indicative.⁵⁸