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The Afghan Civil War: Root Cause, Economic Impact and Prospects for Reconciliation

Dr. Leif Rosenberger, Chief Economist, ACERTAS

The Challenge of Reconciliation

18 years of fighting in Afghanistan is long enough. US President Donald Trump wants to declare victory and cut and run from Afghanistan. That means all the US soldiers would be home well before what Trump hopes will be his re-election in 2020.

Trump picked Dr. Zalmay Khalilzad, an excellent former US Ambassador to Afghanistan, as his US Special Representative for Afghan Reconciliation to help make this happen. The problem is the Taliban sees President Ashraf Ghani’s Afghan government as illegitimate and therefore refuses to meet with it. So Khalilzad must fill the gap and meet with the Taliban himself.

Khalilzad’s talks with the Taliban have been relatively successful. In the most recent round of negotiations the two sides say they are close to agreement on two issues: a timetable for US troops to leave the country and what the Taliban needs to do to prevent international terrorists (like Isis) from operating on Afghan soil.

However, Khalilzad says two other issues are important to the US. First, there must be a ceasefire and second, there must be an intra-Afghan political settlement. Unfortunately, there has not been much progress towards reaching agreement on these two issues.

Khalilzad also insists that “nothing is agreed until everything is agreed.” But the Taliban keeps refusing to meet with the Ashraf Ghani government. So an intra-Afghan political settlement is a non-starter with the Taliban. Thus, the US and the Taliban are at an impasse.

How should the US break the impasse? It might be useful to ask why it is so difficult to negotiate peace. In fact, the World Bank has done some useful research over the years on this very question.

The World Bank notes that negotiating peace is difficult because the US, the Ashraf Ghani government in Kabul, and the Taliban lack the means to lock into an agreement. For starters, the Taliban cannot guarantee that if it accepts a ceasefire, its more extreme members will not form a splinter group and keep fighting. Conversely, the Ashraf Ghani government cannot make binding commitments that the Taliban can trust once they disarm. That’s not surprising. Results from other similar civil wars show that many of the agreements that end civil wars are unstable and collapse into renewed fighting.

The World Bank also notes that the difficulty of negotiating a lasting peace is due to the inability of a third party to credibly commit to the peace. Credible guarantees offered by a third party committed to actually enforcing the terms of an Afghan peace treaty are painfully lacking.

Could the US provide a credible US guarantee for a settlement? Does the US have a credible and well-established US self-interest in preserving the peace with sufficient US military resources? Is Khalilzad in a position to provide costly signals of US commitment by actually deploying US troops to provide credible guarantees?

A credible US commitment is problematic for two reasons. First, Trump reneged on the nuclear agreement with Iran. Why should the Taliban trust Trump for a credible commitment in Afghanistan? Second, given Trump’s interest to permanently cut and run from Afghanistan, it seems unlikely he would want to deploy US troops for peacekeeping after US combat troops leave Afghanistan. That being the case, without such a credible US commitment and without an Afghan government seen as legitimate by the Taliban, there is no apparent incentive for the Taliban to disarm. And since disarmament is typically a precondition for the implementation of peace, these glaring omissions at least appear to create a significant obstacle to Khalilzad’s successful negotiation with the Taliban.

If an external US military solution presently appears unlikely as long as Trump is president, is there another way to make the peace self-enforcing? Some analysts say integrating part of the Taliban into the national army might be one such solution. The problem is the Taliban would lose its bargaining power in relation to the Afghan government once its fighters demobilize. If the Afghan government retained its military, the Afghan government could easily renege on its promise after the Taliban have disarmed. The Afghan government would have both the power and the incentive to either re-negotiate the agreement or defect from it unilaterally.

Reducing Post-Conflict Risk

In peacetime US politicians are fond of using the bumper sticker “peace through strength” when they speak to their base. “Peace through strength” is also music to the ears of the military industrial complex that President Eisenhower used to warn us about.

But what happens in the immediate post-conflict world? How does the government reduce the risk of fighting again? For starters the pressure from the military industrial complex for high military spending is certainly present here as well. But research findings from the World Bank indicates that high levels of military spending in the post-conflict world significantly increase the risk of reversion to war.

For starters an important post-conflict problem is that neither side trusts the other. Thus the more the government spends on the military, the more the rebel organization may think that it too has to prepare for the renewal of conflict. Such mutual military escalation can easily trigger incidents that re-ignite the conflict.

Research indicates that high military spending may well increase the risk of reversion to conflict by inadvertently sending signals to the rebels that the government lacks confidence in the persistence of peace. Therefore, more Afghan government military spending is destabilizing. In addition to the problems resulting from higher military spending, the government could forego the opportunity to realize a peace dividend from reduced spending. Thus, getting to peace is difficult.

But even if peace is initially re-established with peacekeepers like the United Nations, research shows that it is often fragile. World Bank research indicates that countries like Afghanistan face two major risks:

First, when peace is re-established it is often fragile. The 18 year Afghan civil war has developed a momentum of its own. Powerful forces tend to lock it into a syndrome of further conflict. Paul Collier calls these perpetuating factors for more fighting the conflict trap. In other words, it does not take much to upset the apple cart. In fact, the best predictor of whether Afghanistan will be in civil war next year is whether it is now in civil war.

Second, the likelihood of fighting happening again turns on whether or not the country inherits a severe economic and social decline from the period of conflict. Empirical research by the World Bank shows a striking pattern: civil war is heavily concentrated in poor countries like Afghanistan. In other words, poverty increases the likelihood of civil war. Thus, the World Bank’s central argument is the key root cause of conflict is the failure of economic development.

The Failure of Economic Development

18 years after the Afghan conflict began the failure of economic development continues to keep the conflict going and make reconciliation difficult. “You learn what you’re made of not when life is good, but when the ground beneath your feet gives way, and you are left afraid and uncertain what to do?” Those words of Mel Allen, a writer from New England, could easily be describing Afghanistan, a country with a worsening civil war which has now triggered a financial crisis.1 The Afghan foreign exchange rate against the US dollar fell during the first 9 months of 2018 and hit a record low in September. Foreign reserves were also falling. 2 Not surprisingly, Afghan GDP growth was only growing at about 2%, not nearly fast enough to absorb 400,000 new labor market entrants every year.

Kabul also faces a humanitarian crisis. The most direct human effects of 18 year civil war are fatalities and population displacements. For starters, the dynamics of conflict during 2001–16 can be divided into four main periods. During 2001–05, conflict deaths in Afghanistan were in the thousands, with some 4,500 deaths nationwide in this period. During 2006–10, as fighting intensified, deaths increased above 30,000, over half of which were in the Southern region. Throughout 2011–14, conflict deaths declined as foreign troop numbers peaked. In 2015–16 troops left; conflict intensified and deaths increased once again. If we update for the “mini-surge of additional US and allied troops in 2018) the human death toll includes 38,480 Afghan civilians, 58,596 Afghan military and police, 42,100 Taliban fighters, 2,401 US military, 3,937 US contractors and 1,141 allied troops. 3

Forced migration in Afghanistan broadly consists of two groups: internally displaced persons (IDPs) and the refugees who spillover into neighboring countries for safety. Afghanistan is one of the countries with the largest percentage of internally displaced persons (IDPs) in the world. The Watson Brown Foundation estimates that there are 3.7 million Afghan IDPs in 2018. That figure is over 10% of the Afghan population. The UNHCR reports that there are also 1.38 million registered Afghan refugees in Pakistan. Another one million Afghan refugees are believed to be living unregistered in Pakistan.

The violence from the war also creates fear. Businesses close and people stop shopping. The people flee from their homes and many become internally displaced people (IDPs) inside Afghanistan. Along the way most of the Afghans on the move lose the few assets they possess. Those who have financial assets move their wealth abroad. This capital flight doubles Afghanistan’s private capital stock overseas.

There is also brain drain as many of the intellectual assets go to safer places. The disruption of civil war shortens time horizons as well. Many Afghans retreat into subsistence and invest less. The war also severs family and community links.

And as the constraints on criminal activity weaken, crime increases. The illicit opiate economy in Afghanistan was estimated at US$2.8 billion in 2014—equivalent to 13 percent of GDP (UNODC, 2016). In 2017, opium cultivation and refining in Afghanistan reached a record high. Meanwhile, US eradication operations in Afghanistan predictably backfired, pushing much of the Afghan workforce closer to the Taliban. News flash to Donald Trump. Supply reduction is a costly failure. Solutions to the global problem of drug addiction lie within consumer countries themselves. Try education, prevention and treatment to reduce the demand for drugs.

Fiscal Revenue Costs

Now imagine you have the challenge of running Afghan fiscal policy in the midst of this debacle. What kind of challenges do you face? For starters, there are devastating economic costs from the violence. For instance, the war diverts resources from productive activities to destruction. This causes a double loss. First Afghanistan’s economy suffers losses from what the resources were previously contributing. The resources the Taliban controls are part of this diversion from productive activities. Second Afghanistan suffers the loss from the damage that they now inflict.

In addition, increased Afghan military spending is an opportunity cost, crowding out what your fiscal policy could otherwise spend on basic public services (such as health care, education and better infrastructure for your citizens and businesses). Since lower fiscal revenues hamper the ability of the Afghan government to provide these basic public services to its citizens, the government revenue losses therefore contribute to the humanitarian costs of conflict. In Afghanistan, this loss appears very substantial. 4 IMF estimates that conflict-related violence reduced annual national revenues in Afghanistan in 2016 by around 50 %. This is around Af 70 billion, or roughly $1.0 billion, and relative to 2005 levels of violence. 5

Looking ahead, the loss of these fiscal results imply a sizeable potential fiscal “peace dividend” for Afghanistan should political reconciliation lead to peace. In Afghanistan, almost all security spending is funded by foreign grants, which will most likely be scaled back gradually in the event of peace. Hence, any fiscal peace dividend is likely to come principally from increased revenues, as reduced security spending will be mostly offset by reduced grants. In other words, the $1 billion fiscal revenue costs of the Afghan War imply a sizeable potential fiscal dividend for Afghanistan should political reconciliation produce a durable peace.

Root Cause of the Afghan Conflict

Now that we’ve understood how costly the Afghan civil war has been, a number of other questions come to mind. First, why was Afghanistan so prone to violence 18 years ago? And second, why does the war last so long? If US strategists knew the answers to these two questions, it stands to reason they might have a better chance of achieving political reconciliation and durable peace in Afghanistan.

Some scholars look at each civil war as totally unique and distinctive, with its own particular personalities and events. And most of us would agree that any all-embracing, general theory of civil war would therefore be patently ridiculous. That said, when we look beyond the particular personalities and events, important patterns emerge. In fact, some of these patterns are surprisingly strong, which suggests that some characteristics tend to make a country more or less prone to civil war. If so, what made a country prone to civil war?

Many people think they already know the initial circumstances or root causes of civil war. Those on the political right tend to assume that civil war is due to longstanding ethnic and religious hatreds. Those in the political center tend to assume that it is due to a lack of democracy and that violence occurs where opportunities due the peaceful resolution of political disputes are lacking. Some scholars on the political left point to a deep rooted legacy of colonialism.

While each political group speculates, none of these narratives actually sits comfortably with the statistical evidence. Empirically, the World Bank’s most striking pattern is that civil war is heavily concentrated in the poorest countries. Admittedly, war causes poverty. But more importantly, poverty increases the likelihood of civil war.

The World Bank’s central argument is that the root cause of the Afghan conflict and other such civil wars is the failure of economic development. Countries with low, stagnant, and unequally distributed per capita incomes that have remained dependent on primary commodities for their exports face dangerously high risks of prolonged conflict. In the absence of economic development neither good political institutions, nor ethnic and religious homogeneity, nor high military spending provide significant defenses against large-scale violence.

Now let’s turn to our second question. If the average civil war lasts 7 years, why has the 17 year war in Afghanistan lasted so long? IMF found that a wide range of poverty related indicators worsened during the Afghan conflict. These show that per capita income fell, food production dropped, exports growth declined, and their external debt increased as a percentage of GDP. 6 These economic forces in Afghanistan contributed in large measure to what is known as the conflict trap. And once a country like Afghanistan has stumbled into conflict powerful forces—perpetuating economic forces act as a conflict trap and tend to lock it into a syndrome of further conflict.

Financial Exclusion

Another economic problem for Afghanistan has been financial exclusion. (Sahay, 2017). Insecurity and uncertainty in Fragile and Conflict Affected (FCAs) countries like Afghanistan appear to hold back the development of the financial sector. According to the World Bank, 80 percent of adults in FCA countries remain outside of the formal financial system and only 15 percent of adults have an account at a formal financial institution. (Asli – 2013) Afghanistan's financial sector is shallow even relative to other low income and fragile countries. The domestic private credit to GDP ratio remains below 4 percent in 2017. This is extremely low even among the other fragile states at similar levels of development or versus regional comparators.

Afghanistan’s financial sector access indicators are weak. ATMs. According to the World Bank's 2014 Global Findex Survey, the number of ATMs per 100,000 adults in Afghanistan lags other LICs, FCAs, and neighboring countries. And the number of commercial bank branches per 100,000 adults is also small.

A World Bank survey conducted in FCA countries identified barriers to the use of formal accounts. (Asli, 2012) Not surprisingly, poverty is obviously the most common barrier to the use of financial services in Afghanistan. The cost of using financial services in Afghanistan may be higher than in other LICs. Other barriers include religious reasons, lack of trust, documentation requirements, distance to the nearest financial institution and costs of financial account ownership. Borrowing from formal financial institutions is also limited.

Financial inclusion and development are particularly important for fragile and conflict affected (FCA) countries like Afghanistan which are struggling to ensure inclusive growth and generate jobs. Important research by Sahay and others (2015a) and Demirguc-Kunt and others (2017) show how households' access to finance can help the cause because of its positive correlation with GDP growth. At the macro level, this kind of “financial deepening” can also reduce growth volatility by alleviating liquidity constraints on firms and households.

The Economic-Security Nexus

Hans Binnendijk and Stuart Johnson from the National Defense University (NDU) correctly argue that there is now a widening gap between the scale down of US combat operations and the start of stabilization and reconstruction operations in Afghanistan. 7 Bad things happen in this gap (like the rise of ISIS).

When President Obama announced the U.S. drawdown in Afghanistan, the U.S. Treasury did a study that predicted how much of a negative impact would occur to the overall Afghan economy once 85-90% of the war economy went away. The best case scenario would be a 13% cut in Afghan GDP. That equates to the U.S. Great Depression. The worst case scenario would be a 41% cut in Afghan GDP. Either way, jobless numbers soar. 8

So what happens militarily if nothing is done to fill this gap between combat power and stabilization and reconstruction? In East Timor, violence rose when UN peacekeepers played cut and run. 9 Similarly, in Iraq we saw the rise of Isis after the U.S played cut and run with no serious stabilization and reconstruction afterwards. 10 But in Iraq, at least there is oil production separate from the war zones.

In Afghanistan, the good news is there is lots of potential wealth. In fact, the U.S. Geological Survey says there is a trillion dollars of potential mineral wealth. 11 Unfortunately, the bad news is Afghanistan is struggling to turn this potential wealth into actual wealth. Former MIT Professor Walt Rostow would say that Afghanistan lacks the preconditions for economic takeoff. 12

If land-locked Afghanistan had good infrastructure, it could still have market access. But Afghan infrastructure has been largely destroyed because of continuous wars. In this regard, only 7% of the roads are paved. Therefore, this inadequate infrastructure equates to poor market access. When it rains the roads turn to mud or flood. So there is little incentive to increase production.

IMF research shows that Afghanistan’s external trade contributes little to economic growth. Its share of international trade is insignificant. And it has been running a trade deficit for the two decades. Why the trade imbalance? IMF says the country compares poorly with its neighbors especially with respect to the low value of its official exports, which have remained below 10 percent of GDP since 2012, while imports are dominated by foreign financed security spending and aid-related imports. 13

In addition, IMF research highlights Afghanistan’s low degree of trade diversification makes it more vulnerable to external shocks like the current balance of payments crisis. Its external trade is over-concentrated in agricultural products (nearly 45 percent of exports). This reflects the small manufacturing base and a recent decline in specialized products such as carpets and textiles owing to global competition. And its heavy export concentration (to Pakistan and India) expose the country to demand shocks in those markets.

IMF also cites several country-specific factors have held back trade performance. Constant conflict over the last 35 years, a landlocked geography, and infrastructure and institutional gaps have combined to thwart trade expansion. World Bank data documents the costs of Afghanistan being landlocked. The World Bank’s Logistics Performance Index (LPI) shows that on average the delays and costs for both importing and exporting are far higher for landlocked countries than their coastal neighbors.

In essence, therefore, Afghanistan faces a double whammy. On the cyclical side, the war economy is collapsing. On the structural side, it struggles with inadequate infrastructure and poor market access. Together, Afghanistan is facing depression economics. That’s why it needed a Keynesian economic strategy to fill the gap in aggregate demand (or at least to soften the blow).


Fiscal Revenue Cost of the Afghan Civil War

Abadie, Alberto, and Javier Gardeazabal, 2003, "The Economic Costs of Conflict: A case Study of the Basque Country," The American Economic Review, Vol. 93 No. 1, pp. 113–32.

Besley, Timothy, Thiemo Fetzer, and Hannes Mueller, 2015, "The Welfare cost of Lawlessness: Evidence from Somali Piracy, "Journal of the European Economic Association,” Vol. 13 No. 2, pp. 203–39.

Besley, Timothy, and Hannes Mueller, 2012, "Estimating the Peace Dividend: The impact of Violence on House Prices in Northern Ireland," The American Economic Review, Vol. 102, No. 2, pp. 810–33.

Collier, Paul, 1999, "On the Economic Consequences of Civil War," Oxford Economic Papers, Vol. 51 No. 1, pp. 168–83.

Dube, Oeindrila, and Juan F. Vargas, 2013, "Commodity Price Shocks and Civil Conflict: Evidence from Colombia," The Review of Economic Studies, Vol. 80 No. 4, pp. 1384–1421.

Gupta, Sanjeev, Benedict Clements, Rina Bhattacharya, and Shamit Chakravarti, 2004, "Fiscal Consequences of Armed Conflict and Terrorism in Low-and Middle-Income Countries,” European Journal of Political Economy, Vol. 20 No. 2, pp. 403–21.

International Monetary Fund (IMF), 2017, “Gaining Momentum?” World Economic Outlook, Chapter 1, Box 1.1, (Washington: International Monetary Fund).

Knight, Malcolm, Norman Loayza, and Delano Villanueva, 1996, "The Peace Dividend: Military Spending Cuts and Economic Growth," IMF Staff Papers,” Vol. 43 No. 1, pp. 1-37, (Washington: International Monetary Fund).

Mueller, Hannes, 2016, "Growth and Violence: Argument for a Per Capita Measure of Civil War," Economica, Vol. 83 No. 331, pp. 473–97.

Mueller, H. and Tobias, J., (2016), “The Cost of Violence: Estimating the Economic Impact of Conflict,” IGC Growth Brief Series 007, (London: International Growth Centre).

Regional Trade

Arvis, Jean-Franҫois, Gaël Raballand, and Jean-Franҫois Marteau, 2010, “The Cost of Being Landlocked; Logistics Costs and Supply Chain Reliability” (Washington: The World Bank).

Arvis, Jean-Franҫois, Robin Carruthers, Graham Smith, and Christopher Willoughby, 2011, “Connecting Landlocked Developing Countries to Market—Trade Corridors in the 21st Century” (Washington: The World Bank).

Cali, Massimiliano, 2015, “Trading Away from Conflict: Using Trade to Increase Resilience in Fragile States” (Washington: The World Bank).

International Monetary Fund, Middle East and Central Asia Department, Regional Economic Outlook, October 2016 (Washington: International Monetary Fund).

Islamic Republic of Afghanistan, Ministry of Foreign Affairs, Regional Economic Cooperation Conference on Afghanistan (RECCA), 2015, “Towards Regional Economic Growth and Stability: The Silk Road Through Afghanistan” (Kabul).

—————, 2016, Annual Review, “From Negotiation to Investment, Construction, and Trade: A New Decade of Progress” (Kabul).

Rastogi, Cordula, and Jean-Franҫois Arvis, 2014, “The Eurasian Connection—Supply Chain Efficiency along the Modern Silk Route through Central Asia” (Washington: The World Bank).

Rocha, Nadia, 2017, “Trade as a Vehicle for Growth in Afghanistan: Challenges and Opportunities” (Washington: The World Bank).

United Nations Conference on Trade and Development, 2013, “The Way to The Ocean—Transit Corridors Servicing the Trade of Landlocked Developing Countries” (New York and Geneva: United Nations).

World Bank, 2012, “Afghanistan Diagnostics Trade Integration Study (DTIS)” (Washington: The World Bank).

—————, 2017, “Afghanistan Development Update”, May 2017 (Washington: The World Bank).

Financial Inclusion

Atkinson, A., Flore-Anne Messy, 2013, “Promoting Financial Inclusion through Financial Education: OECD/INFE Evidence, Policies and Practice," OECD Working Papers on Finance, Insurance and Private Pensions, No. 34, OECD Publishing, Paris.

Central Bank of Turkey, Prime Ministry Circular No. 2014/10 on Financial Access, Financial Education and Financial Consumer Protection Strategy and Action Plans published in the Official Gazette No. 29021, 5 June 2014, Ankara.

Dabla-Norris, E., Y. Ji, R.M, Townsend, and D. Filiz Unsal, 2015, “Distinguishing Constraints of Financial Inclusion and Their Impact on GDP and Inequality.” NBER Working Paper 20821, (Cambridge, Massachusetts: National Bureau of Economic Research).

Demirguc-Kunt, A., Leora Klapper, Dorothe Singer, 2013, “Financial Inclusion and Legal Discrimination against Women: Evidence from Developing Countries.” Policy Research Working Paper No. 6416 (Washington: World Bank).

Demirguc-Kunt, A., Leora Klapper, Dorothe Singer, 2017, “Financial Inclusion and Inclusive Growth: A Review of Recent Empirical Evidence.” Policy Research Working Paper No. 8040, (Washington: World Bank).

Demirguc-Kunt, A., Leora Klapper, 2012, “Measuring Financial Inclusion: The Global Findex Database.” Policy Research Working Paper No. 6025, (Washington: World Bank). Enterprise Surveys (, The World Bank. 2008-2015. Financial Services Authority of the Republic of Indonesia, 2013, “Indonesian National Strategy for Financial Literacy.”

Kyobe, Yen Nian Mooi, and Seyed Reza Yousef, September 2015, “Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?” IMF Staff Discussion Note 15/17, (Washington: International Monetary Fund).

Sahay, R., Martin Čihák, Papa N’Diaye, Adolfo Barajas, Ran Bi, Diana Ayala, Yuan Gao, Annette Kyobe, Lam Nguyen, Christian Saborowski, Katsiaryna Svirydzenka, and Seyed Reza Yousefi, 2015a, “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” IMF Staff Discussion Note 15/08, (Washington: International Monetary Fund).\


  1. Mel Allen, The Town that Refused to Die, Yankee, Nov/Dec 2018.
  2. EIU, Afghanistan: Country Report, September 2018.
  3. Costs of the War, Watson Institute, Brown University, November 2018.
  4. Data on Conflict and Revenue in Afghanistan comes from the Uppsala Conflict Data Program (UCDP).
  5. This IMF estimate of the impact of the conflict on national revenue matches well with the output loss estimates of Mueller & Tobias 2016.
  6. Philip Barrett, Measuring the Fiscal Revenue Cost of Conflict in Afghanistan, Afghanistan Selected Issues, IMF Country Report No. 17/378, December 2017
  7. Hans Binnendijk and Stuart Johnson, Transforming for Stabilization and Reconstruction Operations Paperback – July 23, 2012
  8. See Leif Rosenberger, Economic Transition in Afghanistan: How to Soften a Hard Landing, The Strategic Studies Institute, US Army War College, October 25, 2011
  9. See New York Times, Peacekeepers Exit East Timor, December 31, 2012.
  10. NPR, Did Obama withdraw from Iraq too soon, allowing Isis to grow? 19 December 2015.
  11. See NBC News, Rare Earth: Afghanistan sits on $1 trillion in Minerals, 5 September 2014
  12. See The Economist, Obituary: Walt Rostow, 20 February 2003.
  13. Patrick Gitton and Murtaza Muzaffari, Afghanistan’s Integration in Regional Trade: A Stocktaking, IMF, December 2017.