Monday, June 14, 2010

War, Rent Seekers, Dutch Diseases, Elite Capture, and One Trillion More Problems in Afghanistan

The NYT today reported that one (1) trillion (a thousand billion) USD worth of mineral deposits have been found across Afghanistan. For a country with a GDP of 21 billion (neighbours Iran make 778 billion, Pakistan 421, Uzbekistan 72), this could be a real boon.

We could go off and discuss how GDP isn't a good measure because of differences in populations,  inequality, the black market, non-market transactions, the non-monetary economy, environmental considerations and externalities, but that is for another time. For now, we can tell there is a trillion dollars sitting underneath one of the most war-torn nations on the planet! What could possibly go wrong?

For decades natural wealth has been discovered in dozens of developing countries, but rarely has it translated into anything beneficial for the average citizen. Why? What becomes of all that wealth?

The most obvious outcome in this case will be an intensified struggle for ownership/control of the land. For details on this I would advise reading someone familiar with the conflict (you know who you are). I will gloss over the civil conflict side for now and simply predict more terrorism and more war. Instead of dwelling on the war as we probably should, let us suppose ISAF is able to gain and keep control over large areas of land to allow for the extraction of these minerals (Ok, a huge leap, I know), what else will go wrong?

The Afghanistan government will likely hand over the rights to mining companies in the US or China for a little cash in the back pocket. Whose back pocket would benefit is not exactly clear. Elites will have to battle for it. In any case, one group - be it the central government or otherwise - will sell off the stuff quickly to seek a little rent. Whats wrong with that?

Finding a great source of wealth outside the (marginally) taxable labour of citizens of their nation and rife with corruption already, the Afghanistan government will allow elite capture of the mineral wealth and ignore their obligations to infrastructure, institutions (ie. health and education) and people. Well, I suppose they won't be worse off than they were before, right?

The natural course of action for a government that has found a revenue stream is to develop that stream. Investment will pour into resource extraction at the expense of other public investments. Any large endeavours into any other economic activity will be sidelined and currently active sectors will eventually crumble. This is a concept known as the Dutch Disease.

If the investment into extractive industries is wildly successful, at best a dubious proposition given the security situation, then Afghanistan has the potential to export a massive amount of minerals. If they export enough to influence the world price then their terms of trade could fall and they could experience immiserizing growth. Given the elite capture of revenue, the rent seeking and the disease from the dutch, a fall in the terms of trade could outweigh the gains from growth.

 All of these perils of extractive industries (and I haven't even mentioned environmental degradation) are general and applicable to any economy. Afghanistan is a special and complicated case where America (and others) are at war with the Taliban. For Afghans only one thing is certain, bringing that money to the surface will only cause more trouble.


  1. Apparently the US knew about all the mineral resources for a little while now, but the NYT article doesn't even mention it...

  2. Year Ror, I was wondering that the whole time I was reading it, actually. The article mentioned that something was discovered in 2001 just after the war was launched.