Revisiting the Relationship Between FDI, Natural Resources, and Economic Growth in Afghanistan: Does Political (in) Stability Matter?

International community assistance, foreign investment, and the extraction of natural resources enabled the reconstruction of institutions, and financial systems and paved the way to accelerate economic growth. Yet, due to the country's recent political upheaval, FDI has stalled, and the citizens of the nation are now in a precarious economic condition. The present study explores the foreign direct investment (FDI) impact and natural resource abundance on GDP growth in Afghanistan over the period 2001Q1-2020Q4. We have applied Autoregressive Distributed Lag (ARDL) bound test techniques and confirmed long-run equilibrium relationships among the variables. The empirical result has demonstrated a constructive control of FDI on GDP, offering evidence that foreign investments follow the (FDI-lead-growth) hypothesis and have contributed to long-term and short-term economic growth. Nonetheless, the influence of FDI inflows on economic growth varies with the magnitude of the natural resource industry. At the same time, the Granger causality testing supported a reciprocal causality between GDP growth, natural resources, and FDI in the long and short run. These research results have imperative policy ramifications for scholars and governments seeking to attain sustainable economic growth.

Automated summary

International assistance, foreign investment, and natural resource extraction have facilitated the reconstruction of institutions and financial systems, leading to accelerated economic growth. However, political upheaval has caused a halt in foreign direct investment (FDI) and has resulted in a precarious economic situation for the citizens of Afghanistan. This study explores the impact of FDI and natural resource abundance on GDP growth in Afghanistan, finding a constructive control of FDI on GDP and a reciprocal causality between GDP growth, natural resources, and FDI.