Diamond War and International Trade and Business - Term Paper Example

Blood Diamonds and the Kimberley Accord: Is the Cure Worse than the Disease? Executive Summary The blood diamond wars in several African nations haveattracted considerable attention primarily because of the human rights atrocities associated with the production of the illicit diamonds. The revenues from these diamonds are used to fund militia and terrorist activities against the governments of countries such as Angola, Sierra Leone, the Democratic Republic of Congo as well as others—hence the name, blood diamonds. This paper examines several business and economic factors that affect the diamond trade. The analysis convincingly demonstrates that intervention in 2003 by the international diamond producers under the auspices of the United Nations, created several unforeseen negative externalities for African countries that have become dependent upon revenues from diamond production to support their domestic programs. The paper concludes that the Kimberley Accord process has not been effective in preventing the production and distribution of blood diamonds. In fact, it has spawned an entirely new illicit diamond distribution network through countries such as Lebanon, Guinea and Venezuela. The author posits that the civil wars funded through the sale of blood diamonds will continue in Africa. Conflict between rival factions has been a part of the continent’s culture for centuries. First it was ivory that was sold on the black markets of Europe and North Africa. Then wars over the gold deposits in South Africa killed thousands of innocent people. Today, the culprit is blood diamonds. Unfortunately, the political and economic realities of the region dictate that the future will mirror the activities and events of the past. Introduction The name “blood diamonds” is derived from the fact that these diamonds are mined and sold by rebel armies, terrorist groups and local warlords to fund their purchase of weapons. These insurgent groups then use the weapons to attack government forces or individuals loyal to the government. Blood diamond revenues (also called conflict diamonds) have grown significantly since the early 1990s. Examples of conflicts funded through this revenue source include wars in Sierra Leone, Angola, Cote d’Ivoire and Democratic Republic of Congo. The blood diamond trade and the human rights atrocities associated with it, received international attention through the 2006 film “Blood Diamond” starring Leonardo diCaprio. The movie created such a public outcry, that De Beers and The World Diamond Council were forced to respond with a public relations campaign that claimed that ninety-nine percent of all diamonds produced in Africa were “blood free.” (www.worlddiamondcouncil.com.). This paper examines the blood diamond industry from a different perspective. It utilizes a business lens to assess the effects of the various blood diamond wars on the economies of the nations in Africa where diamonds represent a significant proportion of Gross Domestic Product. The paper provides an assessment of the economic welfare of these countries since the implementation in 2003, of the United Nations resolution that established the Kimberley protocol. This protocol set in place a certification process for countries exporting diamonds. An Historical Overview A natural resources-for-guns strategy is certainly not new to the African continent and it is definitely not unique to the diamond industry. Wars were being fought and people’s rights violated in Africa first over ivory and later over gold (Martin, 2007). This history is instructive because the elaborate and often undetectable trading infrastructure between rebel groups and suppliers of illicit materials including weapons, the inter-country contacts between various factions, and the money laundering capabilities of these groups throughout Africa have been well established, in some cases, since the 1800s. Two analogous examples outside of the diamond industry serve to reinforce the importance of this point. The drug cartels in South America and the opium cartels in Afghanistan have exactly the same type of system in place as the blood diamond warlords. This system is the very reason why these groups are difficult if not impossible to control. The U.S. has spent billions of dollars fighting the “War on Drugs” since the early 1980s and the street value of cocaine is cheaper today than it was back then. Coalition forces are in their eighth year of fighting the war in Afghanistan and there is no end in sight. The international community, through the United Nations, began to give serious attention to the growing numbers of conflicts in African countries around 1990, although many of the continent’s civil wars pre-dated this time. In Sierra Leone, the Revolutionary United Front (RUF) waged a ten year civil war against the government. The RUF’s operations were mainly funded through the sale of blood diamonds (Zoellner, 2007). The National Union for the Total Independence of Angola (UNITA) is another example of a militant group that engaged in a bloody civil war financed by the illicit diamond trade. The human rights atrocities were so horrific that the United Nations directly intervened. As a result of the Angola situation, the U.N. commissioned a study which resulted in the publication of the Fowler Report. This report received considerable interest because it “officially” linked blood diamonds to civil war in Africa (Fowler, 2000). Similar stories exist in the Democratic Republic of Congo, Zimbabwe and the Ivory Coast (Cote d’Ivoire). By the end of the 1990s, diamond industry analysts estimated that twenty percent of the total global diamond trade was from illicit sources. This prompted a meeting of diamond producing countries in Kimberley, South Africa in 2000. It is important to note that this meeting was not so much a response to the human rights atrocities linked to blood diamonds. Rather, led by De Beers, the company that controls over fifty percent of the international diamond trade, the Kimberley meeting was a response by the diamond producers to protect their collective economic interests. The result of the meeting was the agreement by the seventy countries in attendance to adopt the Kimberley Accord. The Accord was officially ratified by the U.N. and went into effect in August, 2003. Today, all diamond producing nations are supposed to abide by the terms and conditions of the Accord. The major feature of the Accord is the establishment of the Kimberley Process Certification Standard (KPCS). This is an international standard that applies to the import/export of all raw diamonds (www.globalpolicy.org). The problems that KPCS has created in the international diamond industry are discussed in the next section. The Economic Realities of the Diamond Trade There are several significant economic factors that impact the trade of diamonds in 2010 and will continue to do so into the future. These are discussed in detail below. Historically, the diamond market hasn’t really been a market as defined in economic terms. In some sectors, it is tantamount to a monopoly. For decades, De Beers has controlled the global production, distribution and sale of diamonds. In South Africa, for example, De Beers owns ninety percent of all of the diamond mines. The company clearly has the capacity (and it has used it in the past) to alter supply thereby affecting prices. The World Diamond Council’s (heavily influenced by De Beers) publication DiamondFacts predicts that the demand for diamonds will continue to increase well into the future (www.worlddiamondcouncil.org.). De Beers predicts that as a result of increased demand from China and India that the world price for diamonds will increase on average by five percent per year www.debeers.com.). Let us assume that these data are accurate. There is one critical component missing here, however. What about the supply side? De Beers and the Government of South Africa both acknowledge that the supply of diamonds from several mines in Africa is declining as these mines reach the end of their production cycles. But this is not the case in other parts of the world. Australia, Russia and Canada have only recently begun to tap their massive diamond reserves. In fact, the historic domination of the industry by African nations in general and by the De Beers company in particular is beginning to wane and will continue to do so as new diamond deposits are discovered and mined in other parts of the world. This shift in supply phenomenon has huge ramifications for African countries that have become totally dependent upon revenues from diamonds to support economic growth and social development for their citizens. Table 1 shows the changes in Gross Domestic Product for selected diamond producing countries in Africa between 2008-09. The majority of the decline is attributed to the effect of the highly elastic diamond market. Table 1 GDP Data for 2008-2009 Billions of U.S. Dollars Country GDP 2008 GDP 2009 Angola 83.384 65.911 Cote d’Ivoire 23.508 22.011 Botswana 13.461 9.761 DR Congo 11.589 11.223 Congo 10.774 7.742 Sierra Leone 1.955 2.105 Source: International Monetary Fund: World Economic Outlook 2010 The economic effects of the “tainted brand” factor associated with the blood diamond wars has resulted in reduced demand for African diamonds. As noted earlier, consumers have become wary of purchasing diamonds from Africa largely because of the human rights atrocities exposed in the film “Blood Diamond.” The problem is that this tainted brand phenomenon has also posed significant problems for African countries with legitimate diamond operations. The tainted brand factor has been further exacerbated by the global economic recession of 2008-2009. The decrease in global demand for diamonds as a result of the recession has caused major hardship for several diamond producing nations in Africa. This “double whammy” effect of the tainted brand and the global recession, have hit countries like Botswana particularly hard. In 2008, diamond exports from Botswana declined by a staggering ninety percent and government revenues declined by fifty percent (www.allafrica.com.) . Another significant factor that affects global trade in diamonds is what economists refer to as a substitution effect. Primarily because of the increased scrutiny under the KPCS certification protocol, the trade in illegal diamonds has begun to shift to countries such as Venezuela, Lebanon and Guinea. In the case of Lebanon, the country does not have any diamond mines. Yet, its export of raw diamonds has grown exponentially in recent years. The trade infrastructure mentioned earlier that was the backbone of the ivory and gold trading era, continues to thrive in the market for blood diamonds seven years after the Kimberley Accord. The primary change has been that the diamonds now reach markets in locations such as Antwerp through third party intermediaries. This substitution effect has prompted one of the founding fathers of the Kimberley Accord, Ian Smile, to abruptly quit proclaiming that the Accord was in danger of becoming irrelevant (The Independent, 2009). Corruption in many African countries is rampant. This impacts market operations in diamonds and commodities such as agricultural products as well. Government leaders, warlords, police officers and customs officials are often paid off to look the other way or are given bribes to allow forged documents to be certified as genuine. All of the factors discussed above have a profound impact on the global diamond trade and much of that impact has been negative. Blood diamonds continue to reach customers all over the world despite efforts by the international community to cut off supplies. A question that is addressed in the next section concerns future prospects for the regulation of the diamond trade. The Future of the Kimberley Accord There are several factors that cast serious doubt on the ability of the Kimberley Accord in general and the KPCS certification system in particular to successfully end the global trade in blood diamonds. First, compliance with the Accord is voluntary. Several nations who were signatories to the Accord have blatantly violated its provisions. Some have even been kicked out of the coalition. Zimbabwe is a perfect example. Second, even for nations who are well intentioned, the lack of reliable data on diamond production, export and import makes it virtually impossible to monitor trade in illegal diamonds. In examining data that are self-reported by the diamond producing countries in Africa, it is immediately apparent that the information is suspect. For example, some countries report the same numbers in the data year after year. Third, in order for any trade agreement to be even remotely enforceable, there has to be an independent entity that monitors and verifies the trade activity. How is this possible when over seventy nations are signatories to the Kimberley Accord? The United Nations certainly doesn’t have the capacity to do it. Even if independent verification could take place, is the enormous economic cost of trying to ensure compliance worth the effort? The elaborate “underground economy” in many African states has been thriving for centuries. Local warlords derive a considerable source of their power and influence through economic activity that takes place there. This includes the distribution and sale of products such as blood diamonds as well as other commodities; endangered animal products, for example. This is not going to change because there is no reason for this behavior to change. One of the most significant barriers to change lies in the new and creative strategies that have been developed as part of the underground economy to circumvent the Kimberley Protocol. The emergence of countries outside of Africa who are willing to distribute the blood diamonds adds an entirely new level of complexity in tracking and verifying the source of the product. Blood diamonds are a fact of life in the local underground economies of Africa. The reality is that despite well intentioned efforts, there will always be an illicit diamond trade in Africa. The opportunity cost of trying to eradicate blood diamond trade is far too high to generate any real interest within the international community. Conclusion The conflict and human rights abuses associated with the blood diamond wars in Africa will continue much like the conflict in Afghanistan continues. The players may change but the problems persist. As long as individuals demand diamonds, human beings by definition will find ways, legal or illegal, to get the product to market. The Kimberley Accord was a valiant attempt to address a serious social and humanitarian problem. Many of the reasons why the Accord will never curb the diamond wars are obvious in reading this paper. Civil War will continue as it has in Africa for centuries and rogue warlords will continue to exercise power over corrupt government institutions. The nature of the underground economy in blood diamonds makes it impossible to constrain the supply of the illicit product just like it is impossible to eliminate the supply of drugs coming from South American cartels. Unfortunately, the best one can hope for is that the continued resolve of the international community will at least have an incremental impact on improving the lives of the ordinary citizens who reside in these war torn conflict zones. I provide a concluding comment concerning an economic and humanitarian issue that I find personally troubling. What happens to these small, desperately poor countries in Africa when the diamonds are no longer available in sufficient quantities to sustain mining operations? Countries like Sierra Leone, for example, have little in the way of resources other than diamonds and so they are not in a position to try and diversify their economies. How will these nations survive and what, if anything, will the collective international community do to help? This is a question that must be addressed not too many years from now. Bibliography Botswana: Diamond Exports Plunge 90 Percent. Feb 20, 2009. retrieved from www.allafrica.com. Burbank, Joelle. (2006). The Effects of the Kimberley Process on Governance, Corruption and Internal Conflict. The Fund for Peace: Globalization and Human Rights Series. .www.debeers.com DiamondFacts retrieved from www.worlddiamondcouncil.com. The Fowler Report (2000). retrieved from www.un.org Handen, Daniel. (2009). Exclusive: The Return of Blood Diamonds. The Independent. June 25. World Economic Outlook 2010 retrieved from www.imf.org. Martin, Meredith (2007). Diamonds, Gold and War. New York: Simon and Schuster. Zoellner, Tom. (2007). The Heartless Stone: A Journey Through the World of Diamonds, Deceit and Desire. New York: McMillan. . Read More