From Land Mines to Copper Mines

Will Afghanistan's mineral wealth rescue the country from decades of instability and poverty? It just might -- and here's how.

Geologists have discovered vast deposits of iron, copper, gold, and other minerals in Afghanistan, according to a front-page story in Monday's New York Times. Worth an estimated $1 trillion, these resources -- if exploited -- could fundamentally transform the country.

But for better or for worse? Countries with extraordinary mineral wealth -- think of the Democratic Republic of the Congo, Bolivia, and Iraq -- often have extraordinary economic and political ailments. Afghanistan has plenty of both, but that doesn't mean the country is irrevocably doomed to fall prey to what academics have dubbed "the resource curse" -- the idea that natural riches often create more problems than they solve.

Nor should we expect changes overnight. Large mining projects can take years -- sometimes more than a decade -- to develop even under peaceful conditions. True, mineral companies today are so eager to develop new finds that they are willing to work under astonishingly difficult conditions. In the last few years, companies from around the world have been bidding for the right to exploit some of Afghanistan's more modest deposits. But many of the newly reported finds appear to be in zones that are dominated by the Taliban and have little infrastructure. Afghanistan has a long way to go before it can take advantage of its geological wealth.

Yet when it does, the government will reap a considerable revenue windfall. In Afghanistan -- and virtually all other countries in the world, except the United States -- everything beneath the soil is the legal property of the central government. Companies must buy their mining rights from the government, and the signing bonuses, royalties, and other payments can add up. The China Metallurgical Group, which won a bid in 2007 to develop a relatively modest copper mine south of Kabul, agreed to pay the Afghan government $400 million per year -- a substantial sum for a government whose annual revenues -- not counting foreign aid -- are just under $1 billion.

Unfortunately, governments that resemble Afghanistan's -- where corruption is high, and the rule of law and government performance are weak -- typically squander a large portion of these windfalls. Billions have gone missing from the treasuries of Angola, Cameroon, the Congo, Nigeria, and other African countries that have considerable mineral wealth but weak and ineffective governance. Some is lost to corruption, some to political patronage, and some to well-intentioned projects that are poorly planned, poorly built, or poorly maintained.

The Afghan government is already among the world's least effective. Since 2007, it has only managed to collect about 7 percent of GDP in revenues, one of the lowest rates in the world, according to the IMF. This also indicates how fragile its powers are over the population. It has largely survived thanks to foreign aid, which covers about 70 percent of the government's budget. Mineral revenues will fill the government's coffers and may ultimately free it from foreign aid, but what matters is how wisely this new money -- which unlike foreign aid, comes with no strings attached -- is spent.

Whether or not it helps the Afghan people, a flood of mineral revenues will almost certainly bring political benefits to Karzai -- or whoever holds office when the money starts to flow. Leaders in resource-rich developing countries stay in power a lot longer than their counterparts in resource-poor states. Mobutu Sese Seko controlled the Democratic Republic of the Congo for more than three decades, despite his country's descent into chaos; Libya's Muammar al-Qaddafi has held power for more than four, with no end in sight. Politicians with lots of cash make lots of friends. That doesn't necessarily mean they are more effective, or popular -- only more durable. In the developing world, more mineral wealth typically means less democracy.

Yet there are also reasons to be modestly optimistic. Even if it boosts corruption and entrenches the government in Kabul, Afghanistan's mineral riches could also lift the economy enough to promote peace. One reason poor countries are so prone to insurgencies is that joining a rebel army gives impoverished peasants a way to earn a living. When civilian wages rise, studies suggest, rebels become harder to recruit and violence subsides. A boom in mining should lead to a lot of new jobs for unskilled male workers -- jobs for exactly the kind of young men who might otherwise fight for the Taliban.

True, resource wealth -- especially from oil and gemstones -- can sometimes trigger violence instead of ending it. But this typically happens when oil wealth is concentrated in a region dominated by an ethnic minority that seeks independence, unlike Afghanistan, where minerals are scattered around the country; or if it comes in a form that can be easily looted and smuggled abroad, like diamonds. Afghanistan's resource base might be sufficiently diffuse -- both geographically and geologically -- to keep it from fueling further conflict. And the more jobs it creates, the less fighting there should be.

Mineral wealth does not necessarily lead to either ruin or prosperity. Some mining-based economies have thrived: Diamond-rich Botswana has been Africa's fastest-growing country for decades, and Chile -- which produces about one-third of the world's copper -- boasts one of Latin America's richest and most successful economies.

One of the keys to successful mineral development is a strong government that can negotiate a favorable agreement with mining companies and properly regulate their activities. Afghanistan's Mines Ministry has long been perceived as one of the government's most corrupt departments, but this should be no surprise. Even the United States has a mixed record of managing its resource industries -- as the BP disaster illustrates. Regulating a large mining industry is hard work under the best conditions.

At least some members of Hamid Karzai's government seem to be taking these problems seriously. In January, Finance Minister Omar Zakhilwal delayed the awarding of iron and petroleum concessions, evidently to thwart corruption. In February, the government signed on to the Extractive Industries Transparency Initiative, an international agreement that encourages companies to publish what they pay, and governments to reveal what they collect, in the mining business. It is a modest start on a treacherous -- but not impossible -- journey.

Paula Bronstein/Getty Images



Politicians, oilmen, and green-energy boosters love to invoke the idea of energy security. None of them know what they're talking about.

No one envies BP's top brass this week. The company's executives have a full schedule of hearings on Capitol Hill over the next several days, as well as a meeting with U.S. President Barack Obama, at which they are sure to be asked a great many questions about the still-ongoing Gulf of Mexico oil spill that BP simply can't answer. Faced with the prospect of penalties and drilling moratoriums on its U.S. operations, the company is reportedly planning to tell Obama that, in the Financial Times' words, "crippling the company would not be in the interests of the U.S. or its future energy security."

That two-word phrase -- "energy security" -- is an idea invoked frequently by everyone from oil company executives to green-energy proponents, and one that has taken center stage in the United States since the Gulf spill. Last week, Interior Secretary Ken Salazar cited energy security in explaining the need to continue drilling in the outer continental shelf. Senators John Kerry and Joseph Lieberman have argued that their new clean energy and climate bill will help the United States achieve energy security. Obama's new National Security Strategy, published last month, invokes energy security no fewer than four times.

Yet when I brought together a diverse group of 36 experts in April to take stock of what we know about how oil affects U.S. national security (a detailed summary of the discussions and their conclusions is here), the conclusion was unmistakable and troubling: We know a lot less about what energy security is than our confident rhetoric suggests.

Those who talk about energy security usually focus on two vulnerabilities: the impact of oil markets on the U.S. economy and the ways in which oil empowers the countries that produce it. Let's start with the economic argument, which arises from the seemingly strong relationship between oil spikes and recessions. University of California San Diego economist James D. Hamilton has famously argued that almost every U.S. recession since World War II has been caused by a spike in oil prices. Others have disagreed: Federal Reserve Chairman Ben Bernanke, when he was an academic, contended that high interest rates, rather than soaring oil prices, were what did the economy in.

The current recession has rekindled the debate, but in truth, our understanding of how oil affects the U.S. economy is shockingly limited. We hear often, for example, that Americans send a billion dollars abroad every day to pay for oil. But what matters is not only how much Americans spend on oil, or who reaps the profits, but also what they do with them -- something about which we know very little. If oil producers spend the money on U.S. exports, the impact on the U.S. economy might be minimal. If they park it in bank accounts, or use it to fund sketchy home loans, the consequences are likely far graver.

When it comes to the ways that oil empowers countries that produce it, we're equally ill informed. We're often told that oil funds terrorism, but we're actually fairly clueless about how and how much. Different terrorist organizations rely on oil profits to varying degrees, which aren't at all commensurate with the threat they pose to the United States. Hezbollah, for example, is an expensive enterprise to run, and oil money is a critical source of funding, according to a recent Rand study. But al Qaeda is much cheaper to operate, according to the same study, and the group's much-vaunted Saudi oil connection may be relatively unimportant to its survival. Our understanding of how oil empowers hostile states themselves is equally poor. It is hard to tell, for example, whether Iran was able to charge ahead with its nuclear program during the last decade because of high oil revenues, or because of unrelated technical breakthroughs.

Nor do we have a good idea of how much geopolitical leverage oil-producing countries gain from their supplies. Our instincts about oil's potential as an economic and political weapon stem from the 1970s, when hostile Arab producers slashed shipments to the West, causing widespread havoc. Things have changed mightily in the intervening 30 years, however. Global oil markets now buffer oil supply disruptions, while strategic petroleum reserves (large stocks of oil controlled by Western governments, including the United States) provide an additional cushion of safety. Yet we still do not understand the system's limits. Security experts still debate, for example, whether Iran could close the Strait of Hormuz for an extended period, and if it could, what the consequences for global markets would be. They also spend little time trying to understand the conditions under which global oil markets might collapse, or what the consequences of such a development would be.

And while we focus on how oil empowers those who produce it, we know far less about its negative effects on the same countries. Much has been written about the resource curse, which appears to cruelly consign many oil-rich countries (Nigeria is a poster child) to permanent poverty, dictatorship, and strife. Whether smart policy interventions can forestall such consequences, though, is far from understood. Similarly, while much ink has been spilled on the hazards of expensive oil, far less attention has been paid to the dangers of cheap oil. Mexico, for example, gets about 40 percent of its government revenues from oil. A sudden drop in the price of crude could spur unrest and drain the Mexican government of the money it needs to fight security threats that often spill over into the United States. Saudi Arabia, meanwhile, is an enigma on this front: No one knows exactly what plummeting oil prices would do to the country's stability, and few spend much time trying to find out. Yet policymakers rarely, if ever, raise these issues as matters of national concern.

Our confusion about energy security is not just an academic problem -- it has important consequences for U.S. policy. Is BP's financial health really essential to U.S. energy security? That depends on how vulnerable the United States would be to a clumsy sale of the company's assets. And does Obama's new National Security Strategy effectively address the big problems that the United States faces where oil and national security meet? Until we understand that nexus much better, we won't truly know.