How Afghanistan Can Escape the Resource Curse

Local Is the Only Way to Go

A big dig will soon be coming to Afghanistan. (Tim Winborne / Courtesy Reuters)

Until just a few weeks ago, serious talk about an Afghan economy based on natural resources seemed premature. But as Kabul inks more mining deals with international investors -- it awarded two major tenders at the end of 2011 -- and as NATO continues its drawdown of international troops, natural resources are shaping up to serve as the cornerstone of sustainable development there. This raises an unavoidable and possibly tragic question: Considering the country's lack of infrastructure and its rampant corruption, will Afghanistan become yet another data point in the literature on underdeveloped countries that fall victim to the resource curse?

The possibility is real. Officials in both Washington and Kabul claim that the country's mineral wealth is worth as much as $3 trillion. Experts have suspected Afghanistan's resource potential for decades, and U.S. Geological Survey fieldwork conducted between 2009 and 2011 confirmed the existence of significant copper, iron ore, gold, lithium, rare earths, and mineral fuel resources such as coal, oil, and gas, and possibly even uranium.

Mining corporations and the Afghan government have wasted no time. In late 2011, Afghanistan's Ministry of Mines signed an oil exploration and production deal with the Chinese National Petroleum Corporation to develop the Amu Darya basin's 80 million barrels of estimated crude reserves over the next 25 years; production is expected to begin this year. At the moment, the ministry is finalizing details with an Indian consortium of mining companies to develop the Hajigak deposit, one of the largest undeveloped iron ore deposits in the world, which has the potential to produce steel for the next 40 years. Both of these deals come after Kabul signed over to the Chinese the rights to the Aynak copper deposit in 2008, and the Qara Zaghan gold deposit to a consortium of investors gathered together by J. P. Morgan in early 2011. Taken together, these first forays into Afghanistan's newfound subterranean treasure chest will mean billions of dollars in investment over the next decade; there will be new rail infrastructure, power plants, and possibly even a refinery. Kabul will reap significant new tax revenues, and tens of thousands of Afghans will be put to work.

Unconditional celebration, however, would be premature. Agreements notwithstanding, not a single mine has produced anything tangible -- not even the almost four-year-old Aynak copper mine, which will allegedly begin operation next year. Chinese investors also appear to be sliding on their promise to build a railroad as a part of the Aynak deal. Because of likely high operating costs, it remains unclear when the J. P. Morgan consortium will be able to produce an ounce of gold that competes at market prices.

What's more, estimates for trillion-dollar earnings are almost entirely based on resources, not reserves -- a technical but critical difference. Reserve estimates incorporate economic, legal, social, governmental, and environmental risks to determine what is actually profitable to develop, as well as the site-specific mining and metallurgical challenges. Resource estimates result in optimistic press releases; reserve estimates result in foreign investment, jobs, and budgetary contributions. Kabul and Washington have focused on signing deals, thinking that a few key agreements would soothe the concerns of risk-averse investors. But the real challenge for the industry will be in production. And the test for Afghanistan -- herein lies the possibility of a curse -- will be whether or not a majority of the country reaps the secondary benefits of the mining sector's development.

Resource curse theories follow two tracks. On the first, the overwhelming revenue drawn from the sector exacerbates corruption within the government. That scenario is hardly difficult to imagine in Afghanistan, as the country is currently considered the second most corrupt in the world, according to Transparency International. On the second track, increased mineral exports strengthen a country's currency and consequently crowd out other sectors (such as agriculture) from being competitive on the world market. This is a threat in Afghanistan, clearly, as its economy is largely dependent on farming. 

But several countries in Central Asia have struggled with exactly these challenges in recent decades -- and offer a valuable guide to Kabul, Washington, and international investors. Many states in the region are blessed with mineral wealth but cursed by infrastructure obstacles and social instability; accordingly, they have faced challenges in attracting foreign investors, cultivating resources without losing profits to graft, and avoiding introducing new divisions among the population. The most important lesson for Afghanistan to learn is that it will have to build a resource-based economy with the support of local Afghans. 

Take Kyrgyzstan, a mountainous, landlocked country with little rail infrastructure, deteriorating roads, and an economy based on foreign aid, remittances, and mining. Until recently, successive authoritarian leaders since the mid-1990s, such as Askar Akayev and Kurmanbek Bakiyev, advised foreign mining companies to avoid getting involved locally; a few token social projects to placate the people living near a project would suffice. But keeping out of local affairs has backfired. Mining revenues were funneled to elites in the capital, and a negligible percentage went to the local community for development and infrastructure projects.

Over time, local miners moved their families (and wealth) to the capital city; the loss of revenue and investment left the mining towns without running water or a functioning sewage system. In Barskaun, the only paved road is the one that leads to the mine -- Kumtor, a single gold mine, which represents ten percent of the country's GDP. That neglect not only shortchanged the locals but breeds insecurity today. In Aral, where there is a foreign-operated gold mine, armed men on horseback caused a million dollars' worth of damage in October 2011, forcing the site to remain closed until a settlement was reached with villagers three months later.

But then consider Kazakhstan, where the opposite has happened. The country of 16 million is an oil and gas exporter but also a global leader in copper, iron ore, chromite, lead, zinc, gold, coal, and uranium reserves and production. Since its independence in the 1990s, both foreign investors and government officials have focused on socioeconomic development in the areas surrounding key mining sites; today mines serve as a catalyst for province-wide growth. Managers and workers live locally, spend locally, and educate their children locally.

Astana has imposed strict requirements on foreign miners -- forcing them to sign annual memorandums of cooperation with local governors, under which both parties together determine the social investment projects to be funded by the firm in the province for that year. The strategy dates back to the Soviet era, when most of these mining operations had their hand in all aspects of the local community. Today this is reflected in foreign mining companies funding schools, gyms, sports stadiums, daycare centers, and orphanages and foster care networks, as well as providing electric-power capacity to homes and businesses across the country. Not coincidently, Kazakhstan ranks far ahead of all other Central Asian states on country risk indices for foreign investors.

Unfortunately, at the moment Afghanistan is looking more like the former than the latter. Politically the country is already overly centralized in Kabul, and with Aynak and Hajigak within driving distance, it's not difficult to envision a future where the benefits of the extractive sector remain in the capital. Further, while all foreign developers are required to invest in development projects, it remains to be seen if these firms will make good on their promises and if local leaders will be empowered in the subsequent decision-making process. Whereas Kazakhstan enforces strict production and investment quotas -- if you don't produce and invest as you promised, you're out -- citing force majeure in Afghanistan (from war to civil disturbances to labor issues) seems like an easy way for Aynak and Hajigak to renege on local commitments, potentially aggravating the existing socioeconomic gap between Kabul and the rest of the country.

It all comes back to ensuring a positive correlation between increased foreign investment and improved quality of life. In Kyrgyzstan you have armed men on horseback; in Kazakhstan you have local athletes wearing jerseys sporting the foreign miner's logo. There's no question that there are significant differences between the situation in Afghanistan and those in the Central Asian states. Afghanistan's levels of corruption and violence are far higher, the education level is much lower, and on transport infrastructure and power capacity issues, it is starting from scratch. But just as Kabul's mining deals to date are little more than agreements on paper, the unsettled nature of the larger issues can provide an opportunity to forge a path ahead. If Afghanistan wants to achieve that positive correlation of foreign investment with local quality of life -- and in doing so open the gates to foreign investment from the more risk-averse -- the Kabul-based elites and their foreign miners will need to spread the wealth.

 

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