Afghanistan and the Resource Curse

Yesterday, the New York Times reported that the United States has identified “vast mineral riches in Afghanistan“:

The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe.

An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and BlackBerrys.

This report has generated some healthy skepticism (e.g., here). So let me add my own.

First, it appears that the $1 trillion figure reflects the gross value of the resources at current market prices. But it doesn’t reflect the cost of extracting and transporting them. When you factor those in, the net resource wealth of Afghanistan will be much lower than the $1 trillion headline figure.

Second, if these resources are real, Afghanistan may well fall prey to the resource curse that has hit so many other resource-rich nations. Last September, I quoted a Financial Times article on oil that described the problem very nicely:

Poor countries dream of finding oil like poor people fantasise about winning the lottery. But the dream often turns into a nightmare as new oil exporters realise that their treasure brings more trouble than help. Juan Pablo Pérez Alfonso, one time Venezuelan oil minister, likened oil to “the devil’s excrement”. Sheikh Ahmed Yamani, his Saudi Arabian counterpart, reportedly said: “I wish we had found water.”

Such resignation reflects bitter experience of the way that dependency on natural resources can poison a country’s economic and political system. Inflows of hard currency push up prices, squeezing the competitiveness of non-oil businesses and starving them of capital. As a result, productivity growth withers (a phenomenon known as “Dutch disease” after the negative effects of North Sea gas production on the Netherlands). Meanwhile, the state institutions in charge of oil often become corrupt and evade democratic control. And oil-rich states almost invariably waste the income it brings, many ending their oil booms deeper in debt than when they started.

As the FT notes, some countries, most notably Norway, have managed to elude the resource curse. But it’s hard to believe that Afghanistan will be able to follow Norway’s lead.

Dodging the Resource Curse

Over the weekend, the Financial Times had a fascinating piece about Farouk al-Kasim, an Iraqi who is credited with saving Norway from the resource curse:

Poor countries dream of finding oil like poor people fantasise about winning the lottery. But the dream often turns into a nightmare as new oil exporters realise that their treasure brings more trouble than help. Juan Pablo Pérez Alfonso, one time Venezuelan oil minister, likened oil to “the devil’s excrement”. Sheikh Ahmed Yamani, his Saudi Arabian counterpart, reportedly said: “I wish we had found water.”

Such resignation reflects bitter experience of the way that dependency on natural resources can poison a country’s economic and political system. Inflows of hard currency push up prices, squeezing the competitiveness of non-oil businesses and starving them of capital. As a result, productivity growth withers (a phenomenon known as “Dutch disease” after the negative effects of North Sea gas production on the Netherlands). Meanwhile, the state institutions in charge of oil often become corrupt and evade democratic control. And oil-rich states almost invariably waste the income it brings, many ending their oil booms deeper in debt than when they started.

al-Kasim is credited with designing a system that struck a balance among a state-owned oil company, private oil companies, and an independent regulator:

The real achievement, in other words, was not finding oil but coping with its discovery. Norway faced the same dilemma as every other new oil producer with no experience of the industry: if you rely too much on private foreign companies, too little of the oil wealth benefits the country in the form of government revenue or economic development; if you go too far in the other direction, you risk a bloated, politicised oil sector that evades both accountability to the people and competitive pressures to be efficient.

The economic question is fascinating — how can you avoid the resource curse? — but you should also read the article for his unique personal journey (involving a child with cerebral palsy and one of the easiest job hunts in history).

P.S. Other coverage at Curious Capitalist and Kottke.