The Duck of Minerva

The Duck Quacks at Twilight

Would A Few Trillion Dollars Really Help Afghanistan?

June 20, 2010

It is increasingly becoming evident that the venerable New York Times was played by the Pentagon last week. The announcement by a Pultizer Prize winning journalist that Afghanistan may have up to a trillion dollars worth of mineral resources under its war torn soil made a huge buzz. But this bit of “news” planted by the Pentagon was not very new at all (in fact, as the NY Times article notes even the Soviets knew about some of this) and the timing of the announcement seems very suspicious given the dismal shape of the US-led offensive in the southern provinces.

Nevertheless, the news has created its own reality and Afghan officials have recently announced that there is actually $3 trillion worth of mineral resources in the country. Well you know what they say, earning the first trillion is the hardest…

My hunch is that numbers like a trillion dollars are unfathomable for ordinary individuals. The idea of trillions of dollars is as difficult for the average American to grasp as the depth of poverty in Afghanistan where the current GDP (in terms of Purchasing Power Parity or PPP) is around $800 per person. And while $800 per capita is a dramatic increase over the Taliban era, it simply pales in comparison to GDP per capita in the US, which is $46,400 or nearly $127 per person per day. By contrast, Afghanistan is a country in which 45% of the population is unable to obtain the equivalent of 2,100 calories of food per day; nearly two thirds of the population live on less than the purchasing power of $2 a day.

Thus, I thought it might be useful to think through what these number might actually mean for Afghanistan over the long run. Making some laughably simplistic and linear assumptions, let’s assume that Afghanistan’s economy and population will continue to grow at the same rate over the next ninety years. We will ignore the informal economy altogether. Let us also ignore inequality in the distribution of income so that we can just use a very basic index of wealth and poverty: GDP per capita.

Scenario 1: No Massive Mineral Wealth

Afghanistan’s GDP in terms of PPP was $23.35 billion in 2009 and it grew at 3.5% in real terms (in other words the rate of growth when we subtract inflation). The population of Afghanistan was estimated by the US CIA at 29,121,286 in 2009 and the population growth rate was 2.471% per annum. Thus the GDP (PPP) per capita was about $801.82 in 2009. If I can assume that population and GDP will grow at exactly the same rate every year for ninety years, then it would appear that by 2100 the GDP per capita would only be about $1,822.00 (slightly more than double the current per capita income, and approximately the GDP per capita of Tajikistan or Cote D’Ivoire today).

Scenario 2: Massive Mineral Wealth

Now let’s assume (rather optimistically) that Afghanistan has $3 trillion worth of minerals and it can begin to harness a portion of that immediately and in equal installments every year for a century. We will assume that the price of metals will not fluctuate even though we’re adding to the global supply and we will assume that demand will be constant over a century (i.e. no technological innovation that renders these metals obsolete). So let’s say the economy gets $30 billion added to the GDP every year for 100 years starting this year and that this money is directly distributed to the citizens (by magic of course) instead of being invested in infrastructure and education. (Of course, given the current state of infrastructure and insecurity in the country, it would be optimistic to assume that all of the country’s mineral wealth could be extracted by 2110.) By my calculation that would only make the current GDP per capita $1,859.00. In 90 years, the GDP (PPP) per capita would rise to $1,982.00. (This is slightly more than the current GDP per capita of North Korea or Cambodia).

When we compare the two scenarios, we can see that the addition of $30 billion a year to the Afghan economy would permit the economy to leap over decades of hardship. However in comparison to the developed countries, the end result is still quite pitiful in per capita terms.

By 2100, even if the US economy grew by only 1% per year for 90 years and the population continued to grow at the current rate of 0.97%, the US GDP (PPP) per capita would be about $47,823. If the US Economy grew at a more realistic 2% per year with the same population growth rate, then the GDP per capita would be closer to $117,223 in 2100.

Currently, US income per capita is 58 times greater than in Afghanistan. If we take the better scenario for Afghanistan ($1,982 per capita) and compare it to the least favorable scenario for the US ($47,823) the per capita American income would still be 24 times the per capita income of Afghanistan at the end of this century.

What the scenario points out is the difficulty of catching up to the developed countries. Afghanistan is by far one of the poorest countries on Earth. It has very poor infrastructure and very low levels of human capital. A few trillion dollars in mineral deposits will not make Afghanistan into the Saudi Arabia of South Asia (which is not to imply that Saudi Arabia is a developed country by any means).

Scenario 3: Massive Mineral Wealth and Multiplier Effects

Okay, maybe I am being too pessimistic in this (really, really absurd 90 year) projection. What if the “discovery” of these natural resources spurs massive investment in infrastructure and human capital? Although natural resources tend to produce an enclave economy, corruption, and restricted infrastructure let us pretend that all of this wealth leads to multiplier effects upstream and downstream, that there is no corruption, and that infrastructure is built to serve the nation rather than just extractive mining industries. To factor in this multiplier effect, let us add an additional 2% to GDP per year. This would mean that the GDP (PPP) per capita by 2100 would be about $2,022.07. Of course, this is better than if there were no mineral wealth, but it is still a long way off from a prosperous society.

There are other ways in which the wealth could assist the state beside improving per capita income. For example, adding $30 billion to the economy each year could substantially reduce the country’s reliance on foreign assistance and the tax burden on ordinary citizens would be very low. Of course, this assumes that the state would not take out any loans and that 100% of the revenue earned from mineral extraction would be harnessed by the state. It also assumes (improbably) that insurgents and warlords will simply lay down their arms rather than starting a struggle to capture the most lucrative areas of the country. In reality, even if peace broke out, Afghanistan would have to invite foreign firms to extract the mineral wealth and the state would have to settle for earning royalties on the amount extracted. Given the massive amount of corruption in the country, I would estimate that the state would be very lucky to see 20% royalties on the value of the minerals extracted. But let’s ignore these inconvenient details.

Thus, even in the most optimistic scenario, there is little chance that $3 trillion worth of natural resources will usher in a new era of prosperity. At best, if there is no war and no corruption, it will multiply per capita income 2.5 times by the end of the century and it might lead to autonomy from foreign financial assistance. At worst … well Afghanistan has already been there before….

[Cross-posted from my Afghan Notebook]

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Vikash is an Associate Professor of Political Science and Asian Studies at Hobart and William Smith Colleges in Geneva, NY. His main areas of academic interest are (post-) globalization, economic development, and economic freedom, with a regional focus on South Asia