Business Informality as a Deterrent to Peace and Stability in Afghanistan

Afghanistan's business environment has been challenged by years of war, political uncertainty, inadequate institutional investment, and discrimination against women and minorities. With informal activities constituting up to 80% of the economy, growth is hindered, policymaking is complicated, and public service delivery is affected. The economy's vulnerabilities are magnified by heavy reliance on international aid, limited industrialization, and prevalent nonregulatory activities. This study aims to explore the reasons why most businesses remain in the informal sector and the consequence of this on peace and stability. The reasons for remaining in the informal sector are investigated through surveys, interviews, and focus group discussion with formal and informal businesses. Key informant interviews were also conducted with officials of the Ministry of Commerce and Industries and the Ministry of Finance. Respondents mentioned similar issues, including procedural complexity, educational gaps, complex business registration systems, high taxes, weak institutions, and corruption, while even formal businesses noted some positive aspects of the informal sector. The findings and literature analysis indicate that the government's inability to generate sufficient revenue is mainly due to the fact that the large informal sector does not contribute to state coffers, and that this further exacerbates social grievances and conflicts. Weak public services decrease the government's legitimacy and fuel the expansion of the informal sector. Based on our analysis, we argue that measures to encourage the formalization of businesses need to be supportive rather than punitive.