Fraser Forum | May/June 2013
By Alan W. Dowd

After more than a decade of war and nation-building, members of the International Security Assistance Force (ISAF)—the multitasking army of armies that has tried to transform Afghanistan into a healthy, or at least harmless, nation-state—are heading for the exits. Although ISAF will leave behind a better country than what was there in 2001, Afghanistan remains a battered land.[1]However, that land may hold a silver lining.

Mapping Afghanistan’s Future

Afghanistan is veined with copper, cobalt, iron, barite, sulfur, talc, chromium, magnesium, mica, lead, silver, zinc, niobium, and 1.4 million metric tons of rare-earth elements (USGS, 2007; Gardner, 2010). US government agencies conservatively estimated Afghanistan’s mineral deposits to be worth $900 billion in 2009 (Task Force for Business and Stability Operations 3). That figure does not include estimates for the value of Afghanistan’s “industrial-scale lithium deposits” (Brinkley).

Of course, the fact that Afghanistan is rich in minerals is not necessarily new information. The Soviets, for instance, explored and identified mineral deposits in Afghanistan during their decade-long occupation in the late 1970s and 1980s (Medlin). What is new is the volume and precision of mineral-related information about Afghanistan.

Afghanistan is the first country to be fully mapped using what’s known as “broad-scale hyperspectral data”—highly precise and highly sensitive technologies deployed by aircraft that, in effect, allowed US military and geological experts to peer beneath Afghanistan’s skin and paint a picture of Afghanistan’s vast mineral wealth (USGS, 2012). “These maps clearly show the enormous size and variety of Afghanistan’s mineral wealth and position the country to become a world leader in the minerals sector,” according to Jim Bullion, who heads a Pentagon taskforce focused on postwar development and stability (USGS, 2012).

There’s another set of factors at work today that were not present during the Soviet period: These minerals are in high demand in the global marketplace; the dependability of the rare-earth element (REE) supply chain has been called into question; and Afghanistan’s mineral wealth may be able to help knit the country back together after decades of war.

Supply Chain Worries

Let’s look first at the demand for REEs and Afghanistan’s other latent mineral stores. The importance of REEs to the global economy cannot be overstated. REEs are essential to the manufacture of a range of modern technologies, including cell phones, televisions, hybrid engines, computer components, high-efficiency light bulbs, lasers, industrial magnets, batteries, fiber optics, and superconductors. Although lithium is technically not a rare earth, as a key component in today’s rechargeable batteries, it serves some of the same purposes as rare earths. Indeed, the American Physical Society calls lithium, REEs, and other elements “that have the capacity to transform the way we capture, transmit, store, or conserve” energy, “energy critical elements” (APS).

In short, the supply of REEs and like minerals is critical to the technology-dependent global economy of today, which makes a dependable supply chain critical. Regrettably, the main supplier of REEs has proven itself unreliable.

China produces 97 percent of the world’s REEs and has begun to manipulate the global REE market by dramatically slowing and, in some cases, even halting export of these materials (GAO 18, 20). In fact, after a maritime dispute with Japan, China stopped supplying REEs to Japanese customers, reduced overall global exports by 72 percent in the second half of 2010, and then cut export quotas for the first half of 2011 by 35 percent (Wall Street Journal, 2010). Beijing claims its actions were a function of plans to cut pollution (Bloomberg, 2012). 

Although Beijing has resumed delivery of REEs, China’s actions have prompted the United States, Japan, and Europe to explore alternative sources. The good news is that market forces are already at work diversifying the REE supply chain. Australia has new REE mines coming online this year (Taylor). Mines in Brazil, Canada, Vietnam, and the US could start producing REEs by 2015 (Canadian Chamber of Commerce, 2012; Humphries, 2012: 13).

Strategic Stockpiles

Afghanistan can be part of the long-term solution to this REE-supply problem. Just as important, Afghanistan’s mineral wealth could help the people of Afghanistan. To underscore the impact that perhaps $1 trillion in REE development could have in Afghanistan, consider that its entire GDP is just $33.5 billion today (CIA, 2013).

Even so, if rebuilding the rare-earth mining and manufacturing base in the United States, Canada, and Australia—among the richest, most developed, most stable countries on earth—is going to take time, then building a rare-earth mining system from scratch in one of the most broken countries on earth is not going to happen overnight. There’s a reason Afghanistan is not even mentioned in the Institute’s latest Survey of Mining Companies, which evaluated 96 jurisdictions worldwide.

To be sure, the conditions are anything but ideal in Afghanistan: Corruption remains a challenge; stability and security exist only in pockets; and the ingredients that encourage foreign investment—the rule of law, human capital, infrastructure—are in short supply. For instance, political dysfunction is plaguing efforts to build rail lines considered crucial to transporting Afghanistan’s mineral wealth (Nissenbaum, 2012).

Yet what Afghanistan lacks in infrastructure—both institutional and public—it makes up for in rare-earth riches, which explains why foreign governments are willing to look past the many impediments to development. Of course, those impediments are significant, and removing them will require time and a commitment within Afghanistan to embrace economic freedom.

Aiming to build up what the US Department of Energy calls “sizable stockpiles” of REEs—and no doubt exploit its supply advantages—Beijing is eager to develop Afghanistan’s mineral riches (Department of Energy 66). China has won exploration rights for copper, coal, oil, and lithium deposits across Afghanistan (Associated Press, 2013). There are reports that Beijing won the rights to develop the Aynak copper mine south of Kabul by bribing Afghan mining officials $30 million (Risen, 2010).

Make no mistake: China can play an important and constructive role in Afghanistan. Development in Afghanistan can be assisted by foreign investment, and Beijing has the resources to make crucial investments in Afghanistan’s future. In addition, beyond the financial side of the ledger, Beijing has promised to train 300 Afghan police officers, thus contributing to efforts to stabilize Afghanistan (Associated Press, 2013). Before they end their mission, ISAF nations should use their considerable leverage with the Afghan government not to secure sweetheart deals for Western investors and developers, but to ensure a level playing field for any firm willing to take a risk on developing Afghanistan’s mineral wealth.

To encourage this process, some observers have proposed the creation of an Afghan Mineral Fund—“an independent agency run like a public-private investment fund,” in which private investors and Afghan government agencies would contribute resources and “collect and direct extractive revenues” in a transparent manner, thus helping to promote shared development as well as economic growth (Tucker and Khanna, 2010). Similar efforts have been employed in Norway, Kazakhstan, and Mongolia (Tucker and Khanna, 2010).

Another policy solution might be found in the Millennium Challenge Account program (MCA).

Launched by the United States in 2003, MCA offers support to developing countries as they build institutional and physical infrastructure—everything from irrigation projects to roads to property-rights initiatives (Millennium Challenge Corporation). The MCA program is by no means perfect. Indeed, there are limits to what foreign aid programs can achieve. But one important distinctive of the MCA program is that, at least as it was conceived, MCA applicants are supposed to prove their commitment to good governance, economic freedom, and investing in their citizens to earn an MCA grant (Millennium Challenge Corporation). Thus, an MCA-type aid program could have the effect of fighting corruption and promoting economic freedom in Afghanistan because proving a commitment to economic freedom and good governance are prerequisites for MCA grantees. This is important given that Afghanistan languishes at the bottom of a global index of corruption (Transparency International).

Several economic, governance, and security indicators are pointing in a positive direction:

·         ISAF has built an Afghan security force of some 340,000 troops, key to a stable environment after ISAF’s withdrawal in 2014 (O’Hanlon and Livingston, 2013: 6). The US is planning to maintain a force of several thousand trainers and advisors in Afghanistan after 2014, as a backstop against chaos and as a check against interference from neighbouring countries (Bumiller and Schmitt, 2013). Equally important, Washington and Kabul signed a long-term strategic partnership agreement in 2012, committing the US to Afghanistan’s stability well into the 2020s (White House).

·         Insurgent attacks are down and trending lower (O’Hanlon and Livingston, 2013: 10).

·         US/ISAF casualties are at their lowest level since late 2001 (O’Hanlon and Livingston, 2013: 11).

·         GDP is growing at a vibrant pace—an average of 9.6 percent per year since 2008 (O’Hanlon and Livingston, 2013: 23).

·         There are now more than 8 million students attending school in Afghanistan, including some 3 million girls—up from a total of 2 million in 2002, when just a handful of girls were in school (O’Hanlon and Livingston, 2013: 26).

Of course, these represent only some of the pillars of a stable and healthy Afghanistan. The foundations of economic freedom—personal choice, voluntary exchange, freedom to enter and compete in markets, property rights (Gwartney, et. al 1)—have yet to fully take root in Afghanistan. 

Curse or Blessing?

Some observers warn that if Afghanistan’s mining sector does take off, the country could succumb to the so-called “resource curse”—the notion that natural-resource wealth can actually hinder economic growth by diverting investment away from other sectors and encouraging high levels of government spending. Supposed examples include Nigeria after oil discoveries and the Netherlands after natural gas discoveries.

There are two ways to answer the resource-curse naysayers: First, on a very practical level, the world should be so lucky if the resource curse becomes the main concern for Afghanistan—a country that has endured and caused so much heartache.

Second, the resource curse may be a bit overblown. A 2009 Institute report, for instance, found that early studies into the resource curse “overlooked the role of economic institutions and the possible interaction between natural resources and the quality of institutions. Nations with economic institutions of higher quality are more capable of managing their resource revenue and turning it into positive economic growth” (Karabegovic, 2009: 1-3). This underscores the importance of the aforementioned policy prescriptions.

Moreover, Stephen Haber and Victor Menaldo, political scientists specializing in the research of mineral booms, note that “roughly twice as many countries have been blessed by resource booms as cursed by them” (2010). “Until its late 19th century oil and mineral boom, Mexico was not a whole lot different from Afghanistan,” they note, citing poor infrastructure, a largely illiterate population, and a weak central government hampered by warlordism. Oil and mineral discoveries did not cure all of Mexico’s ills, of course. To this day, Mexico remains one of the more corrupt countries in the world, ranking 105th out of 174 nations measured on the corruption index (Transparency International, 2012). However, natural-resource wealth did help stabilize Mexico’s political system and legitimize the state.

Similarly, there are too many challenges—Afghans are still learning about economic freedom; political corruption runs high in Kabul; Afghanistan’s geographic remoteness will always be an issue; Afghanistan’s neighbours to the east and west are mischievous, to put it politely—to think of REEs and other minerals as a panacea. But if something akin to the Mexico model can take root in Afghanistan, then the world can help solve Afghanistan’s instability problem and Afghanistan can help solve the world’s rare-earth supply problem. 

References

APS (February 18, 2011). New APS-MRS Report: Energy Critical Elements—Developing New Technologies to Foster U.S. Energy Independence. APS. http://www.aps.org/about/pressreleases/elementsreport.cfm, as of March 19, 2013.

Associated Press (January 26, 2013).China could prove ultimate winner in Afghanistan. USA Today. http://www.usatoday.com/story/news/world/2013/01/26/china-winner-afghanistan/1866571/, as of March 8, 2013.

Bakr, Amena (October 25, 2010). Afghanistan to Develop $3 Trln in Mining Potential. Reuters.

Bloomberg (September 14, 2012). China Cuts Rare-Earths Mine Permits 41% to Boost Control.http://www.bloomberg.com/news/2012-09-14/china-cuts-rare-earths-mine-permits-41-to-boost-control-1-.html, as of March 19, 2013.

Brinkley, Paul (June 14, 2010). Special Defense Department Briefing. http://www.defense.gov/Transcripts/Transcript.aspx?TranscriptID=4643, as of April 22, 2013.

Bumiller, Elisabeth and Eric Schmitt (January 2, 2013). Afghan War Commander Gives Options for After ’14. New York Times. http://www.nytimes.com/2013/01/03/world/middleeast/afghan-war-commander-gives-options-for-after-2014.html?_r=0, as of March 18, 2013.

Canadian Chamber of Commerce (April 2012). Canada’s Rare Earth Deposits Can Offer a Substantial Competitive Advantage. http://www.chamber.ca/images/uploads/Reports/2012/201204RareEarthElements.pdf, as of March 10, 2013.

CIA (2013). World Factbook. Country Comparison: GDP.

Department of Energy (December 2010). Critical Materials Strategy.

Gardner, David (June 15, 2010). The $1-Trillion Jackpot: US Discovers Vast Natural Deposits of Gold, Iron, Copper and Lithium in Afghanistan. The Daily Mail.

GAO (2010). Rare Earth Materials in the Defense Supply Chain. GAO.

Gwartney, James and Robert Lawson and (2012). Economic Freedom of the World 2012 Annual Report. Fraser Institute.http://www.freetheworld.com/2012/EFW2012-complete.pdf, as of April 22, 2013.

Haber, Stephen and Victor Menaldo (July 1, 2010). Afghanistan and the 'Resource Curse.Wall Street Journal.

Humphries, Marc (2012). Rare Earth Elements: The Global Supply Chain. CRS Report to Congress.

Karabegovic, Amela (2009). Institutions, Economic Growth, and the “Curse” of Natural Resources. Fraser Institute.

Livingston, Ian S. and Michael O’Hanlon (February 28, 2013). Afghanistan Index. http://www.brookings.edu/~/media/Programs/foreign%20policy/afghanistan%20index/index20130228.pdf, as of March 18, 2013.

 Millennium Challenge Corporation (2013). http://www.mcc.gov/pages/about, as of March 10, 2013.

Medlin, Jack (June 14, 2010). Special Defense Department Briefing. http://www.defense.gov/Transcripts/Transcript.aspx?TranscriptID=4643, as of April 22, 2013.

Nissenbaum, Dion (October 3, 2012). Doubt Cast on Afghan Mining. Wall Street Journal.

Risen, James (Jun 13, 2010). U.S. Identifies Vast Mineral Riches in Afghanistan. New York Times.

Task Force for Business and Stability Operations (January 29, 2011). Mineral Resource Team 2010 Activities Summary.  US Department of Defense. http://tfbso.defense.gov/www/attachments/TFBSO_AFGHAN_MINERALS.pdf, as of April 22, 2013.

Taylor, Rob (November 23, 2010). Australia Commits to Rare Earths Supply to Japan. Reuters.

Transparency International (2012). Corruption Perceptions Index. http://cpi.transparency.org/cpi2012/results/, as of March 18, 2013.

Tucker, Christopher and Parag Khanna (December 20, 2010). A Mineral Fund for Afghanistan. Foreign Policy. http://afpak.foreignpolicy.com/posts/2010/12/20/a_mineral_fund_for_afghanistan, as as of March 8, 2013.

USGS 2007 (2007). Preliminary Assessment of Non-Fuel Mineral Resources of Afghanistan, 2007.

USGS 2012 (July 17, 2015). Afghanistan the First Country Mapped Using Broad Scale Hyperspectral Data.

Wall Street Journal(December 29, 2010). China Cuts Export Quota on Rare-Earth Metals.

White House (May 2, 2012). Enduring Strategic Partnership Agreements between the United States of America and the Islamic Republic of Afghanistan. http://www.whitehouse.gov/sites/default/files/2012.06.01u.s.-afghanistanspasignedtext.pdf, as of March 18, 2013.

[1] For measures and examples of improvements in Afghanistan, see Ian S. Livingston and Michael O’Hanlon's “Afghanistan Index,” February 28, 2013, and Peter Bergen’s “What Went Right?” Foreign Policy, March/April 2013.