Wednesday, April 17, 2024
HomeAsiaThe Neglected Crisis: Calling Attention to the Diplomat's Plight

The Neglected Crisis: Calling Attention to the Diplomat’s Plight

In the wake of the Taliban’s rise to power, a critical aspect of Afghanistan’s socioeconomic landscape has been absent from discussions: the urban middle class. The middle class in Kabul and the rest of Afghanistan’s cities have had to cope with radical institutional changes and persistent economic shocks since the Taliban takeover in August 2021. While both rural and urban populations have their own vulnerabilities, the rural population in Afghanistan is expected to be less vulnerable to shocks in non-agriculture and urban labor markets. The rural poor over the years developed diverse insurance mechanisms to cope with economic shocks, while the urban population is less able to adapt. While the focus on Afghanistan tends to revolve around geopolitical tensions and security concerns, the slow erosion of the urban middle class poses a looming threat with implications beyond individual livelihoods, reaching into the heart of Afghanistan’s aspirations for progress and stability. The urban middle class plays a key role in driving economic growth, bringing political stability; in innovation and entrepreneurship; in social cohesion and upward mobility. The erosion of this class not only jeopardizes economic diversity but also diminishes the potential for social and cultural evolution, which was gradually taking root in the urban areas, setting Afghanistan back by decades.

The period following the ousting of the Taliban regime in 2001 saw a gradual development of urban pockets in Afghanistan. Cities such as Kabul, Kandahar, Herat, and Mazar-e-Sharif became emblematic of the significant socioeconomic progress in this era. Of course, there was always room for improvement, yet notable advances were made in some key human development metrics such as education, income, employment opportunities, and skills development. Urban residents were taking baby steps to depart from the traditional century-old agrarian Afghan economy, making them characteristically different from the rural areas.

Studies out of Afghanistan suggest that urban areas have been historically less resilient in the face of political and security crises when compared to rural residents. The urban poor and middle class lack access to formal and informal insurance mechanisms to protect them during economic and political shocks. In more advanced economies formal insurance mechanisms such as unemployment benefits and other welfare state stabilizers ensure the safety of the urbanites whose income depends on wage labor dynamics. Both urban and rural Afghanistan lack these economic policies. However, informal mechanisms – such as access to agricultural land, savings in the form of grains, livestock, and localized co-insurance based on district- or village-level trust and reciprocity – abound in rural areas, making them more adept in dealing with political shocks.

The urban poor and urban middle class in Afghanistan’s major cities – people who broke away from the agrarian economy over the last two decades – have little or no access to these informal insurance mechanisms either. They face the imminent risk that their socioeconomic gains will undergo a complete reversal at times of crisis.

More than two years after Taliban takeover of urban Afghanistan, the impact of these deep institutional changes is beginning to emerge. Economic Crisis Decimates the Middle Class Macroeconomic indicators out of Afghanistan unanimously show that the economy under the Taliban has tanked. Aggregate demand has significantly dropped, the country is experiencing deflation, and imports are falling. There are modest gains in exports because of the cheap sale of natural resources, including coal, to foreign firms. Afghanistan’s average economic growth was around 2 percent between 2014 and 2021; it has fallen by an average of 14 percent since August 2021.

Labor markets are in disarray, unemployment is soaring, and household purchasing power has diminished. For instance, average individual income has fallen by 50 percent, dropped from $512 in 2020 to $252 in 2023; urban poverty has increased from 55.2 percent to 58.1 percent.

Afghanistan’s spiraling inflation of 18.3 percent in 2022 and was replaced by deflation in 2023, with the Afghani’s value dropping 9.1 percent. The Taliban are often credited with keeping the currency stable against the dollar. Far from it. This is not the result of effective monetary policy intervention; instead, the artificial stability is a byproduct of the interactions between the levels of consumption, imports, and $40 million weekly cash injections into the Afghan economy. Falling domestic demand has led to falling imports, meaning businesses do not demand U.S. dollars to make payments abroad. A fall in demand is thus leading to the increased supply of dollars, hence keeping the Afghani’s value stable.

Macroeconomic indicators present averages, and often fail to reflect key aspects of the socioeconomic picture in Afghanistan such as regional disparities, debt levels, and quality of life. For instance, measuring quality of life and happiness goes beyond what GDP figures can provide. Therefore, to understand the challenges of the urban middle class, we must move away from the usual macroeconomic indicators and explore targeted surveys and other measures.

In a recent survey of over 300 professionals, I and my co-author found that two years after the Taliban takeover, among the urban, educated, and economically active residents in Kabul unemployment and under-employment (menial or casual jobs) has risen sharply. Household debt levels have almost doubled; to finance essential needs families reported having to liquidate land, property, and other less valuable assets such as gold jewelry.

Participants found it increasingly more difficult to meet their monthly expenses or purchase food necessities. Household expenditure on food and non-food items, household appliances, outdoor dining, and education substantially reduced in July 2023 compared to July 2021, just prior to the Taliban takeover. We also observed significant reductions in transport spending, registering a major shift in use of public transport instead of personal cars. Participants reported modest increases in their medical bills.

Trust in the banking sector has eroded when compared to before the takeover of 2021; Afghans are depositing increasingly smaller proportions of their savings in commercial banks. When asked what percentage of disposable income was deposited in banks, in July 2021, 45 percent of the participants said less than 10 percent; this figure rose to 96 percent among the participants in July 2023.

The Taliban often boast about the fact that they have managed to collect more revenue than their predecessors. In nominal terms, this is true: Revenue collection has increased slightly post-August 2021. The reason behind the increase could be in part due to the unification of the dual tax system that existed prior to 2021. Both the Taliban and the Republic collected customs duties in areas of their control, but the Taliban taxed transportation routes for right of safe passage, had revenues from illegal mining, imposed levies on smuggled imports and exports, collected royalties on construction projects, and levied the Ushr/Zakat (religious tax). The collection system was consolidated into a unified structure after they took over Kabul, naturally leading to an increase in government revenues.

Equally important, yet less remarked upon, is the Taliban’s extractive attitude toward the private sector (particularly small- to medium-sized enterprises, SMEs) and households in cities. The Taliban started extracting additional revenues from SMEs based in Kabul and other major cities by opening tax disputes against property dealers, universities, wholesalers, commercial buildings, and retail stores. This was based on the premise that these businesses and establishments had outstanding liabilities from the time of the Republic. As for Afghan households, the Taliban have raised electricity bills again and increased the municipality tax (without providing any of the usual services).

Has the Taliban’s aggressive tax collection benefited the people? Has it created more employment opportunities? The answer to both questions is a resounding no. In fact, the size of the civil servant workforce has shrunk significantly, while those was remained employed have seen three rounds of pay cuts since the Taliban takeover. For instance, if a government employee in the Ministry of Defense earned a salary of 30,000 Afghani in 2020, this has now dropped by 50 percent, to 15,000 Afghani.

The rise in revenue thus comes at the direct expense of the urban middle class. To date, the Taliban have not published their budget to show their spending plans. Increasing revenues is an extractive attitude, not an achievement. Finding new ways to raise revenue from Kabul and other city’s residents, who are already financially constrained, does not create a conducive environment where businesses and people thrive.

On Basic Freedoms The middle class in Kabul are also fighting a losing battle to preserve their basic rights and freedoms…

RELATED ARTICLES

Most Popular