Afghanistan’s rare earth element bonanza

After more than a decade of war and nation building, members of the International Security Assistance Force (ISAF) in Afghanistan are heading for the exits. Although what ISAF will leave behind is better than what was there in 2001, Afghanistan remains a battered land. However, the resources Afghanistan’s land holds — copper, cobalt, iron, barite, sulfur, lead, silver, zinc, niobium, and 1.4 million metric tons of rare-earth elements (REEs) — may be a silver lining.

U.S. agencies estimate Afghanistan’s mineral deposits to be worth upwards of $1 trillion. In fact, a classified Pentagon memo called Afghanistan the “Saudi Arabia of lithium.” (Although lithium is technically not a rare earth element, it serves some of the same purposes.)

Of course, the fact that Afghanistan is rich in minerals is not necessarily new information. The Soviets identified mineral deposits in Afghanistan during their decade-long occupation. What is new is the volume and precision of mineral-related information. Afghanistan has been mapped using what is known as “broad-scale hyper-spectral data” — highly precise technologies deployed by aircraft that, in effect, allow U.S. military and geological experts to peer beneath Afghanistan’s skin and paint a picture of its vast mineral wealth. According to Jim Bullion, who heads a Pentagon task force on postwar development, these maps reveal that Afghanistan could “become a world leader in the minerals sector.”

There’s another set of factors at work today that were not present during the Soviet period: REEs are in high demand, the dependability of the REE supply chain is in question, and Afghanistan’s mineral wealth may be able to help knit the country back together after decades of war.

But simply having a rich mineral endowment doesn’t mean that Afghanistan is poised to tap it quickly. Challenges abound.

Supply Chain Worries

The importance of REEs to the global economy cannot be overstated. They are essential to the manufacture of a host of modern technologies, including cell phones, televisions, hybrid engines, computer components, lasers, batteries, fiber optics, and superconductors. Congressional findings have called rare earth elements “critical to national security,” and understandably so. REEs are key to the production of tank navigation systems, missile guidance systems, fighter jet engines, missile defense components, satellites, and military grade communications gear.

The supply of REEs and similar minerals is critical to today’s technology-dependent economy, which is highly dependent on a reliable supply chain. Regrettably, the main supplier of REEs, China, has proven itself undependable.

The Chinese produce 97 percent of the world’s REEs, but have begun to manipulate the global REE market by dramatically slowing, and in some cases halting, export of these materials. After a maritime dispute with Japan, China stopped supplying REEs to Japanese customers, reduced overall global exports by 72 percent in the second half of 2010,cut export quotas for the first half of 2011 by 35 percent, and slashed REE mining permits by 41 percent in 2012, claiming its actions were a function of efforts to fight pollution.

Although Beijing has resumed delivery of REEs, China’s actions have prompted the United States, Japan, and Europe to explore alternative sources. The good news is that market forces are already at work diversifying the REE supply chain.

Australia has new REE mines coming online, and mines in Brazil, Canada, Vietnam, and the United States could start producing REEs by 2015. Thanks to REE finds, Mongolia’s GDP is also primed to triple in the next 10 years.

Leverage

Afghanistan can be part of the long term solution to the REE supply problem. However, building a rare earth mining system from scratch in one of the world’s most broken countries will not happen overnight.

Corruption remains a challenge, stability and security exist only in pockets, and the ingredients that encourage foreign investment — the rule of law, human capital, and infrastructure — are in short supply. For instance, political dysfunction is plaguing efforts to build rail lines considered crucial to transporting Afghanistan’s mineral wealth.

Yet what Afghanistan lacks in infrastructure, it makes up for in rare earth riches, which explains why some governments are willing to look past the many impediments to development. Of course, those impediments are significant, and removing them will require a commitment within Afghanistan to embrace economic freedom, the foundations of which — personal choice, voluntary exchange, freedom to enter and compete in markets, and property rights — have yet to fully take root.

Aiming to build up what the Department of Energy calls “sizable stockpiles” of REEs, Beijing is eager to develop Afghanistan’s mineral wealth. China has won exploration rights for copper, coal, oil, and lithium deposits across Afghanistan, and there are reports that Beijing won the rights to develop a copper mine by bribing Afghan mining officials.

Make no mistake: China can play an important and constructive role in Afghanistan. Development in Afghanistan can be aided by foreign investment, and Beijing has the resources to make crucial investments in Afghanistan’s future. But given China’s stranglehold on the REE market — and the West’s commitment in blood and treasure to Afghanistan’s future — allowing China to stroll in and harvest Afghanistan’s rare earth riches seems both unwise and unfair. Before they withdraw, ISAF nations should use their considerable leverage not to secure sweetheart deals for Western investors and developers, but to ensure a level playing field for any firm willing to take a risk on developing Afghanistan’s mineral wealth.

Curse or Blessing?

Some observers warn that if Afghanistan’s mining sector does take off, the country could succumb to the so-called “resource curse” — the notion that natural-resource wealth can actually hinder economic growth by diverting investment away from other sectors and encouraging high levels of government spending.

There are two ways to answer the resource-curse naysayers: First, on a very practical level, the world should be so lucky if the resource curse becomes the main concern for Afghanistan—a country that has endured and caused so much heartache.

Second, the resource curse may be a bit overblown. A Fraser Institutereport found that early studies on the resource curse “overlooked the role of economic institutions and the possible interaction between natural resources and the quality of institutions. Nations with economic institutions of higher quality are more capable of managing their resource revenue.” To be sure, those institutions remain nascent in Afghanistan. This underscores the importance of policy prescriptions geared toward economic freedom.

Stephen Haber and Victor Menaldo, political scientists specializing in the research of mineral booms, note that “roughly twice as many countries have been blessed by resource booms as cursed by them.” Citing poor infrastructure, a largely illiterate population, and a weak central government hampered by warlordism, they report that “until its late 19th century oil and mineral boom, Mexico was not a whole lot different from Afghanistan.”

Oil and mineral discoveries did not cure all of Mexico’s ills, of course. To this day, Mexico struggles with corruption, ranking 105th out of 176 countries surveyed on a global corruption index. However, natural-resource wealth did help stabilize Mexico’s political system and legitimize the state.

Similarly, there are too many challenges in Afghanistan to think of REEs as a panacea. Political corruption runs high in Kabul; Afghanistan’s geographic remoteness will always be an issue; and Afghanistan’s neighbors to the east and west are mischievous, to put it politely. But if something akin to the Mexican model can take root in Afghanistan, then the world can help solve Afghanistan’s instability problem — and Afghanistan can help solve the world’s rare earth supply problem.