How Afghanistan Can
Escape the Resource Curse
Local Is the Only Way
to Go
February 29, 2012
J. Edward Conway
J. EDWARD CONWAY is an
independent political risk consultant for mining companies in Central Asia. He
is also a doctoral candidate at the Institute of Middle East, Central Asia, and
Caucasus Studies at the University of St. Andrews in Scotland.
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 [1]?
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.
plans to develop
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 (CNPC)
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.
hurdles in materializing
the plans
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.
reserve v. resource (resource
– risk – reserve)
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.
two dimension resource curse
involves
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.
the goal should be
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.
Kyrgyzstan
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.
Kazakhstan
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.
Afghanistan at the
moment
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.
key solution is
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.
Copyright © 2002-2012
by the Council on Foreign Relations, Inc.
Links:
[1]
http://www.foreignaffairs.com/articles/137195/edited-by-paul-collier-and-anthony-j-venables/plundered-nations-successes-and-failures-in-natural-resource-ext
