Using Transparency to Avoid the Resource Curse in Afghanistan

August 3rd, 2010

Christine Clough analyzes whether the recent discovery of minerals in Afghanistan will have a positive or negative impact on quality of life in the country.

Photograph by Steve Evans

Earlier this year the New York Times reported the discovery of vast, untapped mineral deposits in Afghanistan, a country previously considered to be devoid of any valuable natural resources.  For the impoverished people of Afghanistan—and for the NATO countries, especially the United States, that have poured money into the country for nearly a decade—this discovery could be very good news.    Yet if these mineral deposits are not responsibly managed, quality of life for the majority of Afghanis could actually deteriorate through what is commonly referred to as the “paradox of plenty” or “resource curse.”   Under this paradigm, countries with lucrative natural resources—diamonds, timber, minerals, oil, etc.—find themselves plagued by conflict and unable to realize the economic benefits of their natural resources.

The African continent provides several illustrative examples of the resource curse.  The discovery of large diamond reserves in Sierra Leone led to (or was at least a main contributor to) a long civil war that was highly destructive—exacerbating poverty, killing tens of thousands of people, and crippling the country’s economy. Corruption and mismanagement in the diamond sector were rampant, and Sierra Leone was one of the poorest countries in the world.  A rebel movement called the Revolutionary United Front (RUF) was created to remove the corrupt, one-party government.   However, the RUF fell victim to the same corruption it sought to destroy; capitalizing on the breakdown of general law and order it created, the RUF seized control of many diamond-producing reserves and abused the local population in the process.  The Democratic Republic of the Congo (DRC or Congo), with its large deposits of gold, diamonds and minerals, serves as another relevant (and tragic) case. Fighting in the country—which began in the late 1990s as a regional dispute between the DRC, Rwanda, and Uganda—continues to kill hundreds of thousands of Congolese every year, as the Congolese army and rebel factions desperately try to maintain control of the lucrative mineral resources in the eastern provinces of North and South Kivu.

In contrast, diamonds have significantly improved the quality of life for most people in Botswana, while major conflict has largely been avoided.  Unlike Sierra Leone or the DRC, Botswana has been governed by free and fair democratic elections since it gained independence from the UK in 1966, and it is considered to have one of the lowest rates of corruption on the continent.  Good governance helped the country avoid conflict over the control and benefits of the diamonds, and today it is one of the most stable and prosperous countries in Africa.

Unfortunately, the history of Afghanistan’s government and the country’s internal dynamics suggest that violence and poverty—similar to that experienced by Sierra Leone and the DRC—could be what results from the nation’s newly (re-)discovered natural resource deposits.  The government of President Hamid Karzai has a reputation for deep cronyism, inefficient provision of services, and underwhelming local influence and control, all of which heavily favor mismanagement of the resources along the lines of Sierra Leone.  In addition, the deep, historical, tribal divisions within the country create prime conditions for violence to erupt over control of the resources, akin to the current situation in the DRC.  These fates, however, are not inevitable.

Transparency is the key to avoiding the resource curse.  To this end, the government of Afghanistan, with support from the United States, should make it a priority to implement the criteria of the Extractive Industries Transparency Initiative (EITI), which aims to make government officials and mining companies (both state- and privately-owned) accountable to the public, especially with regards to revenue and taxation.

Part of that accountability would come from the principles of country-by-country reporting.  This level of transparent reporting would make it harder for multinational companies to avoid paying due tax in a country like Afghanistan, as they’ll no longer be able to utilize creative accounting techniques to transfer their profits out of the country where business took place and into a low-tax secrecy jurisdiction.  Tax revenue is, after all, what a central government needs to improve the lives of its people: it’s what it needs to fund education; it’s what it needs to provide healthcare; and it’s what it needs to build infrastructure.  Development in these areas is essential for a developing country to break the cycle of poverty.  In-country funding for these projects is also vastly preferable (and more realistic in the medium- and long-run) than aid from the United States and other traditional donor countries, because it fosters host-country responsibility and builds a positive connection between the central government and the population.

Additionally, the disclosure of corporate profits on a country-by-country-basis would aid civil society groups and donors in the fight against corruption and cronyism in Afghanistan.  Extractive industry experts will be able to estimate whether the revenue figures disclosed by a corporation are accurate based on their knowledge of the deposits and the industry.  Relatively accurate revenue figures will in turn support better estimates of government revenue, which outside parties can then compare to figures released by the government on its receipts and expenditures—as discrepancies between the two sources could suggest corruption.  The net result of a country-by-country reporting standard is the potential for more of the wealth generated by Afghanistan’s mineral resources to actually reach and benefit the general population.

Transparent management and reporting of Afghanistan’s natural resources would be a win-win situation for all the parties involved.  The central government will have more revenue, which can then be spent on development; infrastructure; and proper, timely payment of government employees (including the military and police).  The happier, wealthier populous will generate greater legitimacy for political leaders, which contributes to improved government and social stability.  Mining companies will, in turn, benefit from a stable and lawful environment in which to operate eventually improving their bottom line.   Allied governments—and their people—would then transition from the role of donor to a desperate country into investors in a dynamic and rapidly developing country.

Significant progress was made towards country-by-country reporting this past month when the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The legislation included the Energy Security Through Transparency (ESTT) provision, which requires all companies working in the extractive industries and registered with the SEC (i.e. 90% of all major international companies working in the extractive industries) to disclose all payments made to host governments on an on-going basis.  That’s major progress, and it will significantly help curtail corruption in resource-rich countries like Afghanistan.  However, it’s not until we report corporate profits on a country-by-country basis, that we’ll achieve full transparency in this crucial sector.

Written by Christine Clough

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