Zimbabwe’s Diamonds and the Natural Resource Trap

In my last post, I discussed why access to abundant natural resources is actually counterproductive to the development of poor countries.  The idea comes from Paul Collier, a development economist who penned the book The Bottom Billion, a summary of his findings from thirty years in the industry.  While much of the world lives below the poverty line, there are only a handful of countries that have made no progress in terms of economic development over the last few decades.  In fact, most of these “bottom billion” countries have actually regressed, posting negative GDP growth.  According to these countries, each of these countries has fallen into one or more “traps,” which produce a self-perpetuating cycle of stagnancy, at best, or decline.   Access to natural resources is one of these traps.  Here is an overview of why this is so:

Natural resource wealth, in addition to increasing a country’s propensity for civil war, also creates its own trap. In Collier’s view, natural resources can be a curse, because of “Dutch Disease”, which makes a country’s other export activities uncompetitive, and causes commodity price volatility. Countries of the bottom billion are often too poor to harness the wealth they gain from natural resources, such that other sectors of the economy remain stagnant, prohibiting future economic development.

So the money gained from natural resources is not properly invested in improving other industries, such as manufacturing and agriculture, causing them to atrophy.   Once the natural resources dry up, these industries – the real economy – are unable to sustain the false productivity levels during the natural resource boom, to the detriment of the economy as a whole.  This is called the “Dutch Disease”:

In economics, the Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources (or inflows of foreign aid) will deindustrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests

Another negative consequence of natural resources is that it keeps the corrupt governments that control them in power.  Governments are responsible for providing services to the people.  In fact, that is the sole purpose of government – there is no other function.  For Ron Paul fans, that means building roads, paying police and firefighters, and not much else.  For most others, it includes healthcare, education, safety and security, energy, and the economy.  Though, even when the government is severely deficient, totalitarian regimes in Burma, North Korea, and Zimbabwe use violence and political repression to crush dissent and maintain power.

That is why Israel was initially overjoyed when the people of Gaza elected Hamas to run the government.  Israel thought that Hamas would destroy itself from within by failing to provide basic services for the people of Gaza, thereby discrediting itself as a movement and losing the support of the people.  When that didn’t happen, Israel created the blockade that has been at the center of this flotilla hullabaloo.  By starving the Gaza Strip from basic resources – allow enough for survival, but not much else – they would show that continued support for Hamas would come at the expense of the Palestinian people.

To provide these basic services, a government needs to raise funds in the form of taxes.  When the economy is in shambles, tax revenues fall and the government becomes less able to perform its duties.  That is, unless it can raise money in other ways.  That money can come from a lot of different sources, not least of which is foreign aid.  In fact, the main argument against government-to-government aid is that it props up corrupt and repressive regimes in developing nations, creating a culture of dependency and maintaining the status quo when the status quo should be changed. Another source of revenue comes from selling natural resources.  This is what is happening in Zimbabwe right now, with the discovery of a massive deposit of diamonds in the country.

In the article “Diamond Find Could Aid Zimbabwe, and Mugabe,” the New York Times explains the issue:

New mining in Zimbabwe has quickly yielded millions of carats of diamonds and could help catapult the nation into the ranks of the world’s top diamond producers, according to the head of a group of experts for the United Nations-backed effort to stop the trade in conflict diamonds.

But the new wealth has provoked fears that the riches will be used to subvert attempts to bring democracy to a country that has long suffered under authoritarian rule, and also to finance conflicts.

Other experts agree it is an important find, while awaiting more data to gauge its full magnitude. But the steady accumulation of stones has already emboldened President Robert Mugabe, 86, to consolidate control over the Marange fields to prolong his 30-year grip on power, members of his inner circle said.

Though Mr. Mugabe now officially governs under a tenuous power-sharing agreement with his longstanding rivals, the diamond fields are overseen by a ministry run by his party, ZANU-PF, and guarded by an army that reports to him and gives him and his allies lopsided control over a desperately needed economic boon.

Mr. Van Bockstael, a geologist, says he is waiting for Zimbabwe’s promised geological report on the fields. But from interviews with officials and other data, he says they could yield $1 billion to $1.7 billion a year, earnings that would put Zimbabwe in the world’s top half-dozen diamond producers.

Those are huge sums for a country whose gross domestic product was only $4.4 billion in 2009, according to the International Monetary Fund. Zimbabwe sorely needs new money to combat hunger, disease and poverty.

These are conflict diamonds used to fund armed conflict and extracted through slave labor.  Despite efforts to stop their export, the diamonds are smuggled to Mozambique where they can make their way onto the world markets.  One could argue that these diamonds will provide much-needed relief to a country in desperate need of money, regardless of the fact that it will prop up the regime that is largely responsible for its current condition.   But, in the long run, I would guess that very little of that money will ever find its way down to the masses.  Instead, it will keep an old tyrant in power a little bit longer by fattening the pockets of his cronies and the country of Zimbabwe in a continued state of paralysis.   The article closes with a discussion of this “predatory virus”:

Analysts and civic leaders fear that rather than bringing hope for Zimbabwe’s long-suffering people, this new wealth will reinforce authoritarian rule. They say it could finance more of the patronage and repression that have kept Mr. Mugabe in power, and possibly infect the Movement for Democratic Change, the junior partner in the power-sharing government, with what Eldred Masunungure, a political scientist at the University of Zimbabwe, called “the predatory virus.”

“The gravy train is not likely to be one that leads to a democratic destination,” Professor Masunungure said.

Indeed.

[youtube=http://www.youtube.com/watch?v=92FCRmggNqQ]

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"Josh Weinstein is a visionary. I read his blog every day." - Bono
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