Setting Afghanistan on its feet: In pursuit of comparative advantage

“By 2024 it will be the largest driver of economic growth, and it will help smooth the transition from a country heavily dependent on international aid to a country that can stand on its own feet” (Wahidullah Shahrani, Afghanistan’s Minister of Mines quoted in Time, 2011).

On October 7th the US-led invasion of Afghanistan has marked its 12th year. Despite the Western efforts to redevelop this severely war-torn country, the Afghan population remains among the poorest in the world. For many, the principal problem lies in the West’s and currently also the Afghan Government’s inability to solve the security problem and to find a source of revenue for its economy. The Taliban and local drug-lords still enjoy a strong presence, with violence increasing, rather than decreasing, as erroneously reported and admitted by ISAF (Joscelyn, 2012). What is more, this security problem is being exacerbated by the approaching withdrawal of US combat forces that should be completed in late 2014.

Aiming to tackle the above issue, NATO, ISAF and the Afghan Government are conducting extensive training of the Afghan National Security Forces, mainly comprised of Afghan Armed Forces (Army and Air Force) and Afghan National Police, with the former amounting to 185,300 and 6,600 respectively, including nearly 11,000 special forces, and the latter having 151,000 personnel (NATO, 2013). According to NATO’s estimates, the cost of maintaining the ANSF in its post-training and post-US withdrawal period will be US$6 billion per year (NATO, 2010), which is approximately 30% of Afghan GDP.

The international donors have pledged in 2012 at the Tokyo conference to contribute an additional US$16bn for the following four years and to continue their support until 2017. From this support, US$4bn is pledged for local military and security expenditures. Afghanistan crucially needs to find additional US$5bn a year while also finding a driver for its economy, which by more than two thirds remains dependent on foreign aid.

In order to support its security sector once the foreign aid dries out, it is imperative for Afghanistan to focus on a sector that will provide the much needed revenue and funding for national projects. Historically, the country focused on what it can grow and produce optimally, and also what buyers wanted to import. Prior to the Soviet invasion in 1979 approximately 60% of the global production of raisins came from Afghanistan, which along with other dried fruits, nuts, and also carpets and timber represented Afghanistan’s exports (AISA, 2011). However, with the several decades of open conflict and natural disasters, these goods lost their value and lucrativeness and so production focused on poppy cultivation and production of opium, which still provides farmers with better income than any other crop. For example, in 2005, a hectare of poppy yielded approximately US$4,300 in revenue, while a hectare of wheat only yielded US$266 (Perry, 2005). When combined with the existing salam system (based on credits provided to farmers by drug lords), this makes it evident that poppy cultivation cannot be eradicated; rather it needs to be hollowed out by a more profitable economic sector.

It is well known that Afghanistan is home to a vast amount of mineral wealth.  The Afghanistan Geological Survey (2010) reported that Afghanistan’s unexplored mines hold around US$3 trillion of wealth, mainly consisting of iron, copper, nickel, but also precious metals such as gold and silver and many other minerals. Additionally, there are large hydrocarbon basins located in Amu Darya and Afghan Tajik basins, containing roughly 2 billion barrels of oil and 59 trillion cubic feet of natural gas (Ishaq & Farooqui, 2013).

A recent study by McMahon & Tracy (2011) focused on the Aynak copper and Hajigak iron ore depositories highlighting the benefits of the mining sector for the Afghan economy. The average direct impact between 2011 and 2040 would be US$745 million per year. Combined with the procurement to local suppliers, this figure increases to US$1.04 billion, or 11.3% of 2008 Gross National Income.

In other words, just two mines could produce US$1bn a year for the Afghan economy. This calculation allowed the country to secure in 2007 a US$3bn contract with state controlled China Metallurgical Croup (MCC) (SCMP, 2013). Moreover, the Chinese National Petroleum Corp (CNPC) has also signed a 25-year contract for extracting oil from the Amu Darya (Reuters, 2013). Investments like these are believed to bring more jobs than Afghan population can meet.

However, the MCC has recently pressed for a revision of the initial contract and also an Indian consortium led by SAIL called AFISCO has decided to prune down on its investment (Mineweb, 2013), all mainly due to the increasing instability in the region. Companies are afraid of investing in Afghanistan, fearing the post-2014 developments. This predominantly involves legal uncertainties (WPR, 2013), and the threat of increasing insurgency attacks targeting also miners (Telegraph, 2013).

International firms fear losses on their investment due to the poor implementation of law, threat of nationalisation or theft of their equipment. In order to solve this problem, the security of mines should be guaranteed by the ANSF, with oversight or at least guidance from the ISAF forces, which will remain and take on an advisory role in the country after 2014. Last month, the CNCP came under attack by local militia. An increase in attacks by local militia has been observed even in the more peaceful areas, aimed at disrupting the government’s efforts of finding revenue, while the international and Afghan security forces remain largely inattentive (Bezhan, 2013).

Put simply, safeguarding the national treasure and providing security for its legal extraction must become one of the priorities in the transitional and post-transitional period. This in turn will send a positive signal to investors. Moreover, by doing so, the Afghan government can also avoid unprofessional extraction and smuggling of precious minerals abroad. Another area requiring attention is the security of transport routes. A Chinese state-owned company recently pledged to build a railroad as well as 400MW power plant in the country. Such an infrastructure development package must, however, be protected from the Afghan side.

The hopes of both the Afghan government and international donors are that investments in the mining sector could help kick-start the Afghan economy and pay for its security forces. Yet, both need to realise that without providing security around the areas with the potential for resource extraction, such tasks will be difficult to accomplish. While still in the country, the US-led forces need to target support to areas that will provide the Afghan population with economic empowerment. The substantial revenue that can be gained from this obvious comparative advantage that Afghanistan holds can subsequently be used for subsidising farmers and thus slowly rising the living standards and hollowing out the opium economy.

Rudi Vrabel is a postgraduate at the University of Manchester with an interest in forging links between political economy and the field of security. Following his professional experience at the Slovak Department of Defence Policy, International Relations and Legislation, he became interested in the increasing link between security and economic development in Afghanistan, and particularly the relationship between NATO and the World Bank.

Image source: U.S. Navy photo by Chief Mass Communication Specialist Michael B. Watkins/Released

Bibliography:

AISA, (2011), Invest in Afghanistan: Opportunities in Food & Beverage Processing, Afghan Investment Support Agency, Kabul, issued on May 29, 2011

Bezhan, F., (2013), Mineral Wealth Could Harm, Not Aid, Afghanistan’s Future, October 02, 2013, www.rferl.org/content/afghanistan-mining-industry-oil-resources-economy/25124104.html

Ishaq S. & Farooqui S., (2013), Afghanistan-Under Explored Basins and Hydrocarbon Potential Study, Search and Discovery Article #10478 (2013), Posted January 29, 2013, http://www.searchanddiscovery.com/documents/2013/10478ishaq/ndx_ishaq.pdf

Jocelyn T., (2012), ISAF: Oops, Afghan violence didn’t decrease in 2012, The Long War Journal, Online, February 27, 2013 10:14 AM, http://www.longwarjournal.org/threat-matrix/archives/2013/02/isaf_woops_afghan_violence_did.php

McMahon G. & Tracy B., (2011), The Afghanistan Mining Sector as a Driver of Sustainable Growth: Benefits and Opportunities for Large-Scale Mining, Report 68259, Oil, Gas, and Mining (SEGOM), World Bank: Washington DC

Mineweb, (2013), India, China, scale down Afghan mining, Shivom Seth, 29 Aug 2013, Mineweb Uncompromising Independence, Political Economy, http://www.mineweb.com/mineweb/content/en/mineweb-political-economy?oid=202854&sn=Detail

NATO, (2010), Preparing the Afghan National Security Forces for Transition, General Report, NATO Parliamentary Assembly, International Secretariat, 14 November 2010,  http://www.tbmm.gov.tr/ul_kom/natopa/docs/raporlar_2010/d1.pdf

NATO, (2013), Afghan National Security Forces (ANSF), Media Backgrounder, October 2013,  http://www.nato.int/nato_static/assets/pdf/pdf_2013_10/20131018_131022-MediaBackgrounder_ANSF_en.pdf

Perry J., (2005), Field of Dreams: Can Afghanistan, Awash in Opium Poppies, Curtail its Drug Trade and Heroin Tide Headed This Way?, US News & World Report, http://www.usnews.com/usnews/news/articles/050606/6afghan.htm

SCMP, (2013), Afghanistan’s plan to jumpstart economy with Chinese mining investment under threat, South China Morning Post, Friday, 20 September, 2013, http://www.scmp.com/news/asia/article/1313161/afghanistans-plan-jumpstart-economy-chinese-mining-investment-under-threat

Telegraph, The, (2013), Roadside bomb kills eight Afghan mining company workers, AP, 01 September, 2012, http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/10278675/Roadside-bomb-kills-eight-Afghan-mining-company-workers.html

Time, (2011), Mining for Silver Bullets: Why Afghan Minerals Won’t Save the Country, Aryn Baker, October 14, 2011, http://world.time.com/2011/10/14/mining-for-silver-bullets-why-afghan-minerals-wont-save-the-country/

WPR, (2013), Wavering Investors, Legal Uncertainty Threaten Afghan Mining Sector’s Potential, World Politics Review, Matthew C. DuPee,  27 Sep 2013, Briefing, http://www.worldpoliticsreview.com/articles/13235/wavering-investors-legal-uncertainty-threaten-afghan-mining-sector-s-potential

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