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.