 | | Kip Beckman
Principal Research Associate,
Economic Services
|
The U.S. government recently stated that geologists had discovered close to $1 trillion in deposits of gold, copper, cobalt and lithium in Afghanistan. Could this discovery eventually help generate the economic growth, wealth and political stability that can finally lift this country out of the seemingly endless cycle of corruption and violent conflict? Or will Afghanistan fall prey to what is referred to as the “curse of natural resources”? While historical evidence is not overly encouraging for Afghanistan it is not completely gloomy either. On the one hand, Nigeria and Venezuela are two countries rich in oil deposits but mired in poverty and corruption. Alternatively, there are many countries that have successfully managed discoveries of natural resources.
In looking for explanations as to why natural resources frequently leads to so much economic misery, the so called “Dutch Disease” emerges. It was coined after economic developments that took place after the Netherlands discovered oil in the 1960s and 1970s. The oil initially resulted in a surge in export earnings and upward pressure on the exchange rate but eventually the economy succumbed to inflation and declines in manufacturing exports. The Netherlands economy ended up in worse shape after the discovery of oil.
This paradoxical result occurs because the initial increase in a country’s exports resulting from the newly discovered resources leads to higher demand for its currency and, unless the central bank intervenes, currency appreciation. The higher value of the currency makes the price of exports of manufactured as well as other goods more expensive in foreign markets.
In addition to macroeconomic implications, there is another school of thought as to why countries that are blessed with natural resources remain mired in poverty. A look around the world reveals that countries with tons of resources, especially oil, are often ruled by authoritarian, undemocratic governments. In the Middle East, for instance, few of the oil rich countries in this region have a properly functioning democracy. While democracy doesn’t necessarily equal economic success, it is a fact that almost all of the wealthiest countries in the world are democracies and there is a close correlation between democracies and sustained economic success. Alternatively, poorer countries tend to be governed by autocratic rulers.
The current state of affairs in Afghanistan would lead one to conclude that the discovery of natural resources could easily sink the country into even greater chaos. The Karzai government is widely viewed as being extremely corrupt. Also, the country is landlocked and mountainous with a poorly educated population, crumbling infrastructure, a virtually non-existent central government and a Taliban insurgency. Countries that have managed to turn natural resources into economic success like Canada, Norway and Australia all have sound institutions that generally prevent widespread corruption. These institutions can also manage the huge inflow of revenues that transpires when the resources are exported abroad. This is definitely not the case in Afghanistan where good governance is hard to find.
Yet, the picture is not entirely bleak. Some countries that had poor institutions managed to develop into fairly successful democracies during a resource boom. The Hoover Institution’s Stephen Haber points out that Trinidad and Tobago was mainly populated in the 19th century by Indian and Chinese workers who toiled under near slave-type conditions in sugar plantations. The development of a viable middle class and emergence of a democracy was closely linked to the discovery of oil and gas.
Haber also notes that Mexico used to be a country that had many similarities with Afghanistan. Prior to the discovery of oil and minerals in the late 19th century, foreign investors avoided Mexico like the plague: its only roads were footpaths that had been in place since the 16th century and Afghan-style warlords controlled most of the country outside of Mexico City. The Mexican state was pretty much dysfunctional, in the 55 years between 1821 and 1876, the country had 75 presidents!
Mexico’s initial resources boom started in the late 1800s. It did not result in a functioning democracy, but it did lead to more rapid economic growth. The country’s oil boom beginning in the 1970s was a key factor in the development of a multi-party democracy. The democratically elected governments of Vicente Fox (2000-06) and present leader Felipe Calderon have used petroleum taxes to help finance anti-poverty programs and the present war against drug dealers.
Historical evidence suggests that Afghanistan’s huge mineral find will definitely not guarantee wealth and democracy. Neither does it condemn the country to ongoing wars and corruption. A successful outcome will hinge on the emergence of better governance and institutions, sound planning and a healthy dose of good luck.