Afghanistan - Overview of economy

Following the end of 40 years of peaceful monarchical rule in July 1973, Afghanistan was plunged into a war that continued into the 21st century. The end of the monarchy was followed by the setting up of a communist-style regime that collapsed when 100,000 Soviet troops invaded the country in December 1979. For 10 years Soviet forces occupied the country and dictated its governance, but local rebel forces, known as the mujahideen, drove the Soviets out in 1989. The victory by the mujahideen brought no peace to the troubled country, however. For the next several years fighting continued between rival mujahideen factions. By 1996 the sitting government had collapsed, and effective control of the country was seized by the radical Islamic Taliban faction. The Taliban remained in power until 2001 when U.S. attacks toppled the faction from power.

In economic terms, Afghanistan is among the world's poorest countries due to the incessant fighting that has placed the economy on the verge of collapse and taken hundreds of thousands of lives. Two decades of war and political strife left the country's infrastructure in ruins and its people almost entirely dependent on foreign aid. The majority of administrative, economical, and social institutions were wiped out due to the Soviet invasion, mass migration, and continued fighting.

The principal source of revenue in Afghanistan traditionally came from the agricultural sector, and under normal circumstances the country is capable of producing not only enough food to feed its entire population but surplus food to export abroad. But as of 2001 the country was able to produce enough food no longer. Given that the country is heavily dependent on subsistence agriculture, the decline in income levels and the increased lack of food security (a country's ability to feed its own people) increased poverty and caused other economic difficulties. Much of the land that was previously devoted to wheat farming began to be used to cultivate opium poppies, which are used in the production of heroin. The country's transport system was almost entirely broken down, as well as most industry and the agricultural infrastructure. These sectors were so seriously damaged that only sustained massive investment could salvage them.

Before the Soviet invasion in 1979, the economy was almost entirely controlled by the government of Afghanistan, with most investments taking place within the public sector . The private sector extended only to agriculture and trade. The past 2 decades have seen the dismantling of centralized governance and an increase in private sector participation. In 2000 the private sector played a major role in the country's traditional economic activities, and there was still much room for private sector investment in small-scale industries, provided that political stability was achieved. The Taliban emerged in the mid-1990s and swept through the country, taking control in a remarkably short period of time. Political stability was then entirely dependent on the future course the Taliban chose to follow and the economic policies they chose to pursue. The Taliban movement established nominal government in most parts of the country, but it was only recognized by Saudi Arabia, Pakistan, and the United Arab Emirates.

The Afghan economy is famously dependent upon the decisions made by its neighbors' governments. In the past, the country was heavily dependent on economic relations with the former Soviet Union, and in 2001 it was sensitive to economic decisions made by the Pakistani government. An example of this dependency can be seen within the markets. An increase in the prices of essential commodities (basic foodstuffs such as bread and rice) in Pakistan led to an increase in prices of the same commodities in Afghanistan. In addition, when Pakistan de-valued its currency in 1998, the value of the Afghan currency was also reduced. Because of the lack of a governmental infrastructure, there were no reliable economic indicators available for such data as GDP, foreign trade, or national income.