Impact of Fiscal Policy on the Industrial Development of Afghanistan

Abstract

Industrialisation is crucial for economic growth and development, being recognised as the most efficient way to overcome technical and economic challenges and enhance production efficiency and labour productivity. The industrial sector is a key driver of economic progress, underscoring the significance of identifying the factors influencing its development. This study investigates the impact of government fiscal policies on industrial sector development in Afghanistan from 2001 to 2021, employing the ARDL approach. The findings reveal that in the short term, government spending and gross domestic product exert a significant and positive influence on industrial sector development, with GDP exhibiting a more substantial impact than government expenditure. Conversely, industrialisation itself and foreign direct investment (FDI) demonstrate negative effects. In the long term, government spending and FDI significantly impede industrial sector development, indicating that a 1 per cent increase in government expenditure reduces industrial development by 0.31 per cent, while a 1 per cent increase in FDI diminishes it by 0.38 per cent. In contrast, the effect of gross domestic product remains positive and significant in both the short and long term. Thus, expansionary fiscal policies, encompassing heightened government infrastructure investments and support for domestic production, can propel industrial growth.