The Fiscal Cost of Conflict : Evidence from Afghanistan 2005-2016

I use a monthly panel of provincially-collected central government revenues and conflictfatalities to estimate government revenues lost due to conflict in Afghanistan since 2005. Iidentify causal effects by instrumenting for conflict using pre-sample ethno-linguistic share.Headline estimates are very large, implying total revenue losses since 2005 of $3bn, andfuture revenue gains from peace of about 6 percent of GDP per year. Reduced collectionefficiency, rather than lower economic activity, appears to be the key channel. OLS estimatesunderstate the causal effect by a factor of four. Comparing to estimates from Powell's (2017)generalized synthetic control method suggests that this bias results from omitted variablesand measurement error in equal share. The findings underscore the considerable economicloss due to conflict, and the importance of careful identification in measuring this loss