Macroeconomic factors affecting economic growth in Afghanistan from 2004 to 2023 : a study case of the natural resources and infrastructure sectors

Abstract

The weak economy in Afghanistan offers a special dimension to consider how growth in conflict-stricken and aid-reliant states is driven. This thesis explores the correlation amid the products of foreign direct investment (FDI), inflation, unemployment, the Human Development Index (HDI) and monetary increase estimated in terms of gross domestic product (GDP) within a given period of 2004 to 2023. Through the use of Ordinary Least Squares (OLS) regression, supplemented by diagnostics and variance decomposition, this study offers empirical evidence on the short and long-term factors of growth in a context that witnessed post-conflict reconstruction, strong international dependency, and recent domestic resource mobilization. The results indicate that, in terms of being consistent and significant, HDI can drive GDP growth better, and this underlines the centrality of human capital, which is possessed by people in the form of education, health, and income in producing the sustainable development. Conversely, the influence of FDI on growth does not make any substantial direct influence, which symbolizes the institutional weaknesses, insecurity and low absorptive capacities in Afghanistan. Unemployment rates clearly turn out to be a major drag on performance, as per the Okun Law and, although not always important in the regression model, in decomposition nearly 42 percent of the variance of GDP could be explained by inflationary rates clearly indicating its destabilizing nature in long run growth volatility scoring. These findings fit into the overall body of literature on growth in fragile economies by supporting the idea of human development theory and endogenous growth models, although they also demonstrate the ineffectiveness of external inflows of capital in an economy that lacks institutional reform. The policy implications include giving more emphasis on investments on human development, macroeconomic stability by controlling the inflation, reforming the labor force to create jobs and integrating FDI into the domestic value chain as opposed to extractive projects. The key sectors that are found to improve resilience and aid dependencies include strategic infrastructure development, diversification into laborintensive sectors and value-added, and enhanced governance mechanisms. The limitation of the present study includes data constraint, sample size, and methodology aspects of OLS that limit causal inference and leaves out essential variables like security shocks, aid flows, and the quality of governance. These gaps may be addressed by future research through higher frequency or provincial data, advanced econometric methodologies (VAR, VECM, GMM) and integrating quantitative analysis with qualitative case studies of flagship projects, e.g. the TAPI pipeline or CASA-1000. Through its framing, of Afghanistan growth experience in the dual context of fragility and transition, this thesis does not merely provide empirical evidence but also provides a policy relevant framework on which national strategies as well as international assistance to post-conflict economies can be based.