to decline after 2011, and more recently a slowdown of the withdrawal process was agreed, with approximately 15,900 US troops remaining on the ground in 2015 and 2016. But this is a far cry from the more than 130,000 international troops present in Afghanistan at the height of the “surge”, in 2011. The other key component of the transition is the expected decline in foreign aid, especially from USAID.

Until recently, there was optimism that this transition would not have major impacts on economic growth and Afghanistan would remain on an upward trajectory. Kapstein and Kathuria (2012) had concluded that foreign aid had set the country on a more inclusive growth trajectory, despite the political and social tensions. The landmark study _Afghanistan in Transition_ (World Bank, 2013), concurred that foreign aid had an important role in driving economic growth in the country. But it did not see the transition as a concern as long as other sources of economic growth—such as commercial agriculture and mining corridors—were developed to fill the void. Other, more recent economic reports maintained this upbeat assessment, forecasting growth rates in the vicinity of 8 percent over an extended period of time (IMF, 2011; World Bank, 2014).

Analyses of this sort were generally muted on conflict, and how it would evolve as a result of the withdrawal of international troops. Yet the security situation was already deteriorating in 2012, and conflict intensity has markedly increased since then (United Nations Assistance Mission to Afghanistan, 2015). In parallel, the revenue allocated to the security sector has been on an upward trend, accounting by now for more than a third of the country’s GDP. With fewer international troops on the ground, the country’s ability to counter a deteriorating security situation is challenged by its weak fiscal position (World Bank, 2016).

The goal of this paper is to gain a better understanding of the relationship between conflict, aid and living standards in Afghanistan. In doing so, the paper aims to explain the paradox of lower poverty in areas more severely affected by conflict. It also intends to address current concerns about the transition, shedding light on its possible impact on the dynamics of conflict and living standards in the medium term.

The analysis relies on provincial level data on conflict over period 2007-14, and on cross-sectional household data in 2011. The former is used to estimate a dynamic model of conflict intensity at the provincial level, depending on current and lagged presence of troops. The latter allows to identify the determinants of consumption per capita, and in particular to assess the role played by conflict, aid and the presence of troops. These two models are combined to predict consumption per capita from 2012 onwards, and conflict intensity at the provincial level from 2015 onwards. Comparing these out-of-sample simulations with actual figures on economic activity available until 2015 allows validating the proposed empirical approach.

Admittedly the quantitative model used to forecast the dynamics of conflict cannot incorporate strategic shifts in the insurgency and watershed political developments, such as a potential agreement between the government of Afghanistan and the Taliban, or possible tension between rival groups within the Taliban, or between the Taliban and the Islamic State. Therefore, the forecasts of conflict intensity should be interpreted with extreme caution. However, by suggesting 4