The resignation over the weekend of Afghanistan's deputy mining minister passed with hardly a murmur in Washington, but it appears to bode ill for the future management of the country's mineral wealth.
Indeed, according to a June 14 article by James Risen of the New York Times, Afghanistan is rich. The United States pegs the value of the country's mineral deposits at $1 trillion, which dwarfs its $12 billion annual GDP. As Risen says, this discovery could transform Afghanistan into "one of the most important mining centers in the world." Or, as the Pentagon put it, Afghanistan could become the "Saudi Arabia of lithium." Leaving aside the fact that a lot of people have known about these mining deposits for quite a while, I'd have to agree with Gen. David Petraeus's assessment that this mineral find offers "stunning potential" for Afghanistan.
However, as Michael L. Ross writes, we need to temper our exuberance, as the discovery of natural resources in a developing country is not always the good news it appears to be. In fact, resource-rich developing countries face the significant challenge of using their natural wealth to improve the living standards of average citizens, rather than wasting it through weak institutions and corruption, a phenomenon often referred to as the "resource curse." Civil wars and political turmoil tend to exacerbate the problem.
All this is fairly well known. Yet the minerals, they tell us, are there -- and Afghanistan is racing ahead to develop them. But how can a war-torn country beset with corruption manage to succeed where many more stable countries with far stronger institutions have failed?
One increasingly popular option for dealing with the resource curse is the commodity-based sovereign wealth fund (SWF). Countries as diverse as Angola, Azerbaijan, and Venezuela are turning to these special-purpose financial vehicles to help ensure proper management of resource revenues. The idea is that, by sequestering some or all of their resource revenues in an SWF, countries can better smooth resource price volatility, make long-term fiscal policy, manage the currency appreciation associated with mineral exports, facilitate intergenerational savings, and, perhaps most importantly, minimize corruption and tame the political temptation to misuse the newfound wealth. In effect, a properly designed commodity fund offers a powerful "commitment mechanism" that can prevent a pool of revenues from turning into slush funds for the political elite.
Afghanistan desperately needs an SWF of its own, but the simple act of creating an SWF is not enough to overcome the resource curse. The new fund must also be accompanied by the appropriate design and governance principles and practices. But how to do it?
Two SWF success stories are most relevant to this case. First there's Papua New Guinea, which has an enormous liquefied natural gas project in the works. The country is already well into its own SWF due diligence despite the fact that its gas revenues aren't expected to come online until 2014. In fact, the country's Treasury Department recently released a "discussion paper" that outlines various factors that the government will need to take into consideration in setting up its new fund, from the importance of professional management, transparency, and accountability to some key structural and design characteristics. For Afghanistan, the lesson here is that planning can (and should) begin long before the resource revenues arrive.
Another model is São Tomé and Príncipe, a classic example of the challenges that a small, poor country can face when trying to manage oil wealth. As the Harvard Kennedy School's Jeffrey A. Frankel points out, the country in 2004 established something called the National Oil Account to receive all national hydrocarbon revenues. The 2004 law also set out to ensure that the new SWF was well designed and governed to ensure proper stewardship of the country's finite natural resources. And despite some political instability -- there was a failed coup attempt in 2003 inspired by the promise of looming oil wealth -- this tiny island nation off the west coast of Africa has managed to set up an SWF with all of the appropriate features to prevent the resource curse, from defining strict formulas for calculating the "annual funding amount" that the government receives from the SWF to laying down the rules governing the management and investment of the assets.