Supply & Demand

Afghanistan Is a Much Bigger Economic Disruption Than Markets Think

Two Afghan girls look out from a hill over Kabul in 2002. (Oleg Popov/Reuters)
The fall of Afghanistan could end the decoupling of financial markets and geopolitical events.

Given the utter chaos set off by the Biden administration’s bungled exit from Afghanistan, it may seem more than a little surprising that global equity markets have barely budged. The market’s reaction to the fall of Kabul follows a fairly reliable pattern of geopolitical events “decoupling” from global markets. There is a significant chance, however, that markets have underestimated how bad the Afghan news is about to be for the global economy.

An economic disaster is on the verge of unfolding in Afghanistan. To think about how bad it is likely to get, consider that when the Taliban were ousted in 2001, according to the World Bank, Afghan GDP was a bit less than $4 billion, with a population of about 21 million citizens. The Taliban had cracked down on education so much that only about 20 percent of primary-school-aged children were enrolled in school, and life expectancy at birth was only about 56 years. By 2020, GDP had climbed all the way to $20 billion — with the population soaring to 38 million, primary-school attendance rates of almost 100 percent, and life expectancy at birth all the way up to almost 65 years.

The tragic truth is that the Taliban seem hell-bent on reintroducing policies that take their people and their economy back to the 1990s. One can be sure that GDP will give back most of the gains since 2000. Such a shock will be an almost unbearable burden for the citizens of Afghanistan, but its economy is so tiny that the only significant direct economic effect will come through a trade effect in heroin markets.

But the U.S. retreat will have effects far more powerful than the direct economic effects might suggest. Indeed, there are both near-term and longer-term effects that suggest that a wave of flight to safety could well be around the next corner.

First, in the short term, one can presume that millions of refugees will head north and west. This will strain humanitarian resources, especially in this time of COVID-19. Moreover, the astonishing weakness demonstrated by President Biden is an open invitation for geopolitical rivals to flex their muscles. The rumbling is already under way, with the Chinese Communist Party’s Global Times wondering ominously in an editorial, “Is this some kind of omen of Taiwan’s future fate?” In the wake of the Western inaction during China’s “absorption” of Hong Kong, Beijing is incentivized to move quickly, especially given the threat that collapsing support for Biden will lead him to be replaced in 2024 by a tougher Republican. If China grabs a Taiwanese island or two, one wonders if President Biden will even notice. Whether he does or doesn’t, markets will.

As bad as China’s behavior is likely about to be, Russia’s will be even worse. It seems highly likely that the collapse of the international order previously upheld by America and its allies will motivate Russia to be more adventurous in Ukraine and to resume at the very least the cyber-harassment of the Baltics. Putin can be expected to double down on cyberattacks here in the U.S., perhaps even taking a swing at one of our major exchanges.

The war against the Taliban, recall, happened because state sponsorship of terrorism was a force multiplier for al-Qaeda. With the freedom to move about the country and set up training camps and to disperse recruiting videos across the Internet, an operation as complex and deadly as 9/11 became possible. How long will it take the terrorists of multiple stripes to rebuild that terrorist infrastructure? It took them about four years last time, but this time their recruiting should be even more effective. After all, who doesn’t want to join a winning team? This means that the progress that we have made against terror is likely to reverse as well.

As these developments become more visible to markets, risky assets will be repriced and everyone will be wondering what the bottom looks like.

PHOTOS: Afghanistan Evacuation

Kevin A. Hassett served in the Trump administration as a senior adviser to the president and is a former chairman of the Council of Economic Advisers. He is the senior adviser to National Review's Capital Matters, a new initiative focused on financial and economic coverage, and is the Vice President of the Lindsey Group.

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