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Afghanistan: Balancing Social and Security Spending in the Context of a Shrinking Resource Envelope

Listed author(s):
  • Aqib Aslam

    (Economist, International Monetary Fund)

  • Enrico Berkes

    (PhD student, Northwestern University)

  • Martin Fukac

    ()

    (Principal Advisor, The New Zealand Treasury)

  • Jeta Menkulasi

    (Economist, International Monetary Fund)

  • Axel Schimmelpfennig

    (Senior Resident Representative to South Africa, International Monetary Fund)

For Afghanistan, the dual prospect of declining donor support and high ongoing security spending over the medium term keeps its government budget tight. This paper uses a general equilibrium model to capture the security–development trade-off facing the government in its effort to rehabilitate growth and fiscal sustainability. In particular, it considers strategic policy options for counteracting and minimizing the negative macroeconomic impact of possible aid and revenue shortfalls. We find that the mobilization of domestic revenues through changes in tax policy is the preferred policy response for the Afghan central government. Such a response helps to place its finances on a sustainable path in the near term and preserve most of the growth potential. Cutting expenditures balances public finances but causes the economy to permanently shrink. Debt financing helps to preserve much of the economy size but can quickly put the sustainability of public finances at risk. © 2013 Asian Development Bank and Asian Development Bank Institute.

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/ADEV_a_00033
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Article provided by MIT Press in its journal Asian Development Review.

Volume (Year): 31 (2014)
Issue (Month): 2 (September)
Pages: 165-197

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Handle: RePEc:tpr:adbadr:v:31:y:2014:i:2:p:165-197
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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Eli Berman & Jacob N. Shapiro & Joseph H. Felter, 2011. "Can Hearts and Minds Be Bought? The Economics of Counterinsurgency in Iraq," Journal of Political Economy, University of Chicago Press, vol. 119(4), pages 766-819.
  3. Richard Hogg & Claudia Nassif & Camilo Gomez Osorio & William Byrd & Andrew Beath, 2013. "Afghanistan in Transition : Looking beyond 2014," World Bank Publications, The World Bank, number 13107, December.
  4. Jordi Galí & J. David López-Salido & Javier Vallés, 2007. "Understanding the Effects of Government Spending on Consumption," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 227-270, 03.
  5. Nadiri, M Ishaq & Prucha, Ingmar R, 1996. "Estimation of the Depreciation Rate of Physical and R&D Capital in the U.S. Total Manufacturing Sector," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 43-56, January.
  6. Andrew Berg & Rafael Portillo & Edward F Buffie & Catherine A Pattillo & Luis-Felipe Zanna, 2012. "Public Investment, Growth, and Debt Sustainability; Putting together the Pieces," IMF Working Papers 12/144, International Monetary Fund.
  7. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
  8. Beath, Andrew & Christia, Fotini & Enikolopov, Ruben, 2012. "Winning hearts and minds through development ? evidence from a field experiment in Afghanistan," Policy Research Working Paper Series 6129, The World Bank.
  9. Tiffany Chou, 2012. "Does development assistance reduce violence? Evidence from Afghanistan," Economics of Peace and Security Journal, Economists for Peace and Security, vol. 7(2), pages 5-13, July.
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