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© USIP 2013 • All rights reserved.

“Just as the enormous 

increases in resources since 

2001 profoundly affected 

Afghanistan’s political economy, 

drastic declines in international 

military expenditures and aid 

during transition will do the 

same...in the short run, sharp 

declines in resources could 

prove destabilizing and 

conflict-inducing, especially 

at the local level.””

September 11, 2013

Changing Financial Flows 

During Afghanistan’s Transition

The Political Economy Fallout

William Byrd

E-mail: wbyrd@usip.org 

peaceBrieF157

Summary

•	 Massive amounts of money flowing into Afghanistan since 2001 (foreign military spending, aid,

domestic revenues, opium profits, land takeovers and development, informal mineral exploitation, theft of fundssuch as at Kabul Bank) have had profound political economy impacts, not

least by further entrenching factionalized politics and fragmented patronage networks.

•	 The ongoing transition involving the drawdown of international troops and Afghan takeover

ofsecurity responsibilities will be accompanied by drastic declinesin international military

expenditures and aid.

•	 Total resourcesfor patronage will fallsharply; the Afghan government’sshare in remaining

funds will increase; declines will be greatest at local levels, especially in insecure areasin the

south/east which had heavy international military presence and high aid; and drug money will

become increasingly important.

•	 At lower levels of patronage, competition over declining resources may intensify,so even in the

absence of major armed conflict at the national level, localized conflicts may continue and even

proliferate, aggravated by taking revenge and“settling accounts”by currently excluded and

marginalized groups.

Introduction: Financial And Political Economy 

Developments Since 2001

Afghanistan since 2001 hasseen massive inflows of financialresources.The mostimportant ofthese—

with significant portions available for patronage and vulnerable to corruption—include:

•	 International military expenditures, which surpassed $100 billion per year at the peak. Although the bulk has not been spent in Afghanistan, local expenditures around U.S. military

bases for security, transport, and other services have been very large.

•	 International aid to Afghanistan (civilian plus support to Afghan national security forces—

ANSF), reaching a peak of around $16 billion in 2010 (equal to Afghanistan’s GDP in that

year), compared to roughly $200-300 million annually in humanitarian assistance during

the pre-2001 Taliban regime.
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Changing Financial Flows During Afghanistan’s Transition

page 2 • PB 157 • September 11, 2013

•	 Afghanistan’s domestic budgetary revenues, which have grown from lessthan $100 million

per year immediately after 2001 to more than $1.5 billion annually in recent years.

•	 Opium grossrevenues, which fluctuate greatly but increased from well under $1 billion per

year in the late 1990sto an average of close to $3 billion per year during 2006-2011.

Other funds of a smaller or irregular nature have substantially augmented resourcesfor patronage

and corruption. Prominent examplesinclude:

•	 Kabul Bank, a massive theft of close to $1 billion of the Afghan public’s deposits.

•	 Informal exploitation and illicit export of Afghanistan’s minerals, gemstones, timber, etc., hard

to estimate with precision but in aggregate amounting to many hundreds of million dollars

per year.

•	 Takeover of public lands, urban and peri-urban land development, etc., much of which has

occurred illegally and has generated enormous profits.

These resource flows have had profound impacts on Afghanistan’s economy, governance, and

politics. Economic growth has averaged nine percent per year, but corruption has dramatically

increased and is now among the worst in the world according to international indicators. Key

political economy patterns and developments over the past decade include the following:

Decentralized control over armed violence has continued to be an important factor in patronage—financial resources have often accrued to those linked to militias and other armed groups.

While the expansion of ANSF has altered this picture somewhat, ANSF are still far from having a

monopoly of organized violence in the country (even aside from the Taliban insurgency).

Patronage has been personalized and transactions-based, with very little systematic“institutionalized patronage”through organizationssuch as political parties.

Patronage has inordinately benefited those with access while excluding and marginalizing 

other groups, and therefore has been divisive, especially at the local level. At the center, a“division

ofspoils”has occurred among the loose anti-Taliban coalition that came into power in 2001, albeit

with some factions and groupsleft out. Patterns of exclusion have been more severe and often

deadly at local and provincial levels, and some excluded groupsjoined with the Taliban or other

anti-government elements due to their marginalization and lack of accessto government patronage.

Political alignments and associated patronage have been shifting and unstable, typically involving short-term deals, with re-opening of bargaining and changing alignments(sometimesthrough

threatened or actual violence).

Most of the larger financial flows over the past decade have been outside the direct control of 

the national government. Thisis very different from pre-1978 foreign funding where control was

typically centralized with the government and itsleader.

Formal government positions have played a lynchpin role in patronage.Allocation ofsenior government posts has been a vehicle to reward allies and followers,representing an important part ofthe

“spoils”at central (ministers, deputy ministers, othertop appointees) and sub-national levels(provincial

governors, district heads, provincial and district police chiefs, etc.). Moreover, government positions

have been importantfor dispensing patronage through other means, including within ministries and

departments asthey have built up capacity and carry outregulatory,service delivery, and otherroles.

Contracting of politically-connected private businesses has been a crucial mechanism for patronage. Contract issuersinclude foreign military entities, development and security aid donors, and

the government itself (small amountsinitially, increasing over time). Contractsrange from security,

transport for the military, and logisticalservicesfor bases, to construction, roads, and otherservices.
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Changing Financial Flows During Afghanistan’s Transition

page 3 • PB 157 • September 11, 2013

Overall, these trends—superimposed on underlying fragmented, conflictual patronage

politics—make for a complex picture characterized by considerable fluidity, fragilities, and risks.

Factionalized politics appearsto have become further entrenched, with heavier distortions

induced as more funds became available for patronage. Based largely on its appointment authority and other formal powers under Afghanistan’s constitution, the central government comprises

the apex of patronage networksin the country, but there are also centrifugal tendenciesfueled by

the fragmentation of aid and linkages between international military and local powerholders.

Changes And Implications During Transition 

Afghanistan’s ongoing transition, involving drawdown of international troops and ANSF taking

over full responsibility forsecurity, is being accompanied by major changesin financial flows. Just

asthe enormousincreasesin resourcessince 2001 profoundly affected Afghanistan’s political

economy, drastic declinesin international military expenditures and aid during the transition will

do the same. Key changes will include: 

Total resources for patronage will decline to much lower levels than in recent years. The fall will

be especially sharp for international military contracting and off-budget civilian aid.

The share of the national government in remaining funds can be expected to increase. This

reflects declines in off-budget resources, efforts to increase on-budget aid, and the increasing

relative importance of domestic revenues.

Declines will be especially severe at the local level, particularly where there have been 

international troops and bases. This is a natural consequence of foreign troop withdrawals, base

closures, and phasing out of associated spending.

The impact of declining resources will vary across regions. More insecure areas in the south

and east, where there was heavy international military presence and very high aid, will suffer the

most.

Drug money will become increasingly important in relative and most probably absolute 

terms. As other financial inflows decline, and with increasesin opium cultivation and production

expected in 2013 and subsequently, the role of drug money in patronage and politics will increase.

The balance of armed power is likely to shift in favor of regional/local levels. Departure of

most international military forces will leave local power vacuums many of which ANSF will be

unable to fill, giving local and regional strongmen a freer rein.

What are the likely political economy implications of these major financial changes? Given

uncertainties about elections, political transition, and dialogue/reconciliation with the Taliban,

making any predictions would be hazardous, but some provocative questions can be raised.

Control over senior government appointments most likely will continue to be a lynchpin of

patronage. However, it is not clear whether a greater share in much smaller financial inflows will

enhance the importance of central authorities and top politicians in providing patronage, or

whether the overall decline in funding, and possibly worsening insecurity, will on balance weaken

the central government’s role in this regard.

A related question is whether and how sustainably the loose patronage“network of networks”

centered around the current government leadership will hold together during the political transition. This will depend in large part on how the 2014 presidential election plays out—namely,

whether a candidate from the current president’s entourage and endorsed by him wins.
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Changing Financial Flows During Afghanistan’s Transition

page 4 • PB 157 • September 11, 2013

Given the importance of the central government in patronage, the formal powers vested in

Afghanistan’s presidency, and hence the“winner takes all”character of the 2014 presidential election, political economy-based incentivesto manipulate the election by those who can do so will be

very strong. The key question is whether countervailing factors would allow a reasonably successful

election to occur. These could include: emergence of a“consensus candidate”and team that brings

together a critical mass of elite groups; a small number of credible competing candidates/groupings

that would effectively exercise checks and balances vis-à-vis each other (but refrain from resorting

to violence after an election loss); public and civilsociety oversight,supported judiciously by the

international community; orsome combination of these. 

How will patronage groups adapt to much lower levels of funding and changesin its composition? 

The decline in international assistance may well increase dependence on drug money, diversion/misuse of domestic revenues, and on-budget expenditures by patronage networksseeking to survive,

with problematic consequences.

Another question concerns whether the enormous wealth already built up (particularly wealth

anchored in Afghanistan and not easily expatriatable, e.g. real estate) will have a stabilizing impact

because the beneficiaries have much to lose from instability and conflict, and whether this will

offset possible adverse impacts ofsharply diminished financial inflowsthat willsqueeze new

resourcesfor patronage.

Itshould not be presumed that declining resourcesinevitably will cause political and security

deterioration. If the enormousrecent financial inflows have been correctly viewed astemporary

“windfalls”by Afghan elites, the impact on behavior of their decline may be more limited than

expected, particularly for those at the top who have already made fortunes.

However, at lower levels of patronage, competition over declining resources, on which livelihoods

depend, may intensify. So a possible scenario is avoidance of major armed conflict at the national

level, but continuation and perhaps proliferation of localized conflicts. Moreover, changing power

balances may lead to taking revenge and“settling accounts”by currently excluded and marginalized

groups at the local level, where exclusion has often been severe and violent.

Conclusion

Burgeoning inflows of fundssince 2001 have had profound, often problematic political economy

consequencesfor Afghanistan. Much lower, more“normal”and less volatile resource inflows

post-transition may be stabilizing over the longer term—lessto contest over, and less egregious

wealth differences between beneficiaries and those excluded. But in the short run,sharp declines

in resources could prove destabilizing and conflict-inducing, especially at the local level. A broader

question is whether central elites and their patronage networks can hold the state together in the

face of declining funding and amidst continuing and possibly increasing local conflicts, or whether

these changes will further undermine and put at risk weak state structures.

About This Brief

William Byrd is a development 

economist and has worked on 

Afghanistan in various capacities 

over the past decade and longer. 

His publications include numerous 

reports and articles on Afghanistan’s 

economy, public finance management, aid issues, governance and 

corruption, security sector financing, 

extractive industries, and opium 

economy. He is currently a senior 

expert at the U.S. Institute of Peace, 

where his work focuses on the country’s economic transition including 

the political economy and conflict 

implications of the major changes 

in financial flows that are underway. 

The views expressed in this brief do 

not necessarily reflect the views of 

the U.S. Institute of Peace, which 

does not take policy positions.