Afghanistan’s Economy Heading For ‘Hard Landing’, But Somalia Looking Better

Afghanistan’s economy is heading for a sharp slowdown, as we explain in Business Monitor Online and the next edition of our monthly South Asia Monitor publication. The Afghan economy has grown at an impressive clip, averaging around 9% or so over the past decade, but this is unsustainable, given that the world’s major powers are likely to make steep cuts in aid to the country as NATO states withdraw their troops over the next two years. Foreign aid makes up a huge proportion of the Afghan economy, and the reduction of this will also worsen Afghanistan’s budgetary position. We still believe that the Afghan economy has considerable potential, mainly because of its vast commodity resources, but the obstacles to realising this potential are formidable to say the least.

Our latest Afghanistan article is an opportune time to consider the ‘BLANK’ group of ultra-frontier economies – Burma (Myanmar), Laos, Afghanistan, and North Korea – we identified some years ago. As things stand, Myanmar probably looks the most promising, especially with the EU having lifted the last of its sanctions the other day. Laos is the least controversial BLANK economy, even though it is a one-party communist state. The latest news from there is that it appears to be proceeding with a high-speed railway that will connect it with China – although as we mention in our online service, the US$7.2bn cost will probably outweigh the benefits.

Among the remaining two BLANK economies, it is hard to say which is in a worse position – Afghanistan or North Korea. North Korea at least has a semblance of stability, an educated and disciplined workforce, and considerable homogeneity (which means less risk of interethnic conflict), but if or when it collapses, it could land very hard. Yet, once North Korea lands hard, it would probably receive massive financial assistance from South Korea, Japan, the US, China, and Russia, paving the way for its long-term revival and eventual convergence with the South (albeit after decades). It is hard to see Afghanistan being that successful.

Naturally, it is tempting to be very downbeat towards failed or semi-failed states. However, Somalia – arguably the world’s most consistently chaotic state over the past 20 years – has shown signs of improvement of late, with money pouring in from abroad. In fact, the shilling currency has appreciated sharply, threatening the recovery. If even Somalia can show a semblance of recovery, then other war-torn states could too.

Full coverage of frontier economies, including the ones listed above, is available to subscribers at Business Monitor Online.