3 May 2017

Diamonds -- and Mugabe’s legacy -- are forever

Max writes:*

In 1980 Robert Mugabe came to power in Zimbabwe, following Zimbabwe’s war for independence. The 93 year old President has been in power for 37 years and has made clear he intends to run in the upcoming elections in 2018. Meanwhile, the economic situation in Zimbabwe is dire. In 2002, following the implementation of fast track land reform the agricultural sector of Zimbabwe crumbled down, resulting in major food shortages. To this day, Zimbabwe has been unable to deal with the recurring food shortages in an effective manner. Zimbabwe is also dealing with a major debt crisis which occurred following loans from International Financial Institutions, such as the IMF and the African Development Bank. External debt is estimated [pdf] to be as high as 79% of GDP. Moreover, the country abandoned the Zimbabwe dollar in 2009 after an unprecedented case of hyperinflation, which was the result of Mugabe’s tendency to print more money when he needed to fund the budget deficit and pay off debts to, for example, veterans of the civil war. In November 2016 the Zimbabwean central bank started with the distribution of bond notes pegged to the dollar. This has not resolved the issue, since many shop owners refuse to accept this “Zombie Currency” as means of payment. It is safe to say that Mugabe’s failing policies have ruined Zimbabwe’s economy. It is unlikely that Mugabe will rule for much longer, due to his age and health issues, and both the ruling party and the opposition are planning for a post-Mugabe Zimbabwe. The new ruling elite will have to come up with a new source of revenues in order to invest in the agricultural sector to make sure the population is fed and the economy will function again. The beginning of a solution may be found below the surface of Zimbabwe: diamonds.

The ‘resource curse’ hypothesis [pdf] suggests that natural resource abundance reduces economic growth. However, Botswana, one of Zimbabwe’s neighboring countries, achieved the highest average rate of economic growth in the world between 1970 and 1997, which can be attributed to their successful management of the flow of income induced by a diamond boom [pdf]. The case of Botswana illustrates that, if managed properly, diamond revenues can be used to drive economic growth. Although it is impossible to know exactly how much diamonds the Zimbabwean earth contains, it is known Zimbabwe has the largest diamond field on the planet. In a policy paper by the World Bank [pdf] it is explained how a sustainable diamond policy might foster human development by the development of infrastructure and the creation of linkages with other sectors of the economy (see Figure 1). In order for the proposed policies to be effective, Zimbabwe would have to change its mining laws drastically. According to Jonathan Robb Jr. [pdf], Zimbabwe’s Mines and Minerals Act, which vests the right to minerals in the President, would have to be revised in order to promote transparency. Furthermore, he convincingly argues that the Empowerment and Indigenization Act, which requires that indigenous Zimbabweans own at least 51 percent of all companies operating in Zimbabwe, discourages the needed investment in the diamond industry by foreign companies.

It is important to acknowledge that in order for the diamond industry to become a driver of economic growth the Zimbabwean government would have to undergo substantial reform, and whether that is politically feasible is doubtful. Currently, it seems that the diamond industry is being used by Mugabe to buy support from members of the political elite. Whether this will change any time soon is arguable. Nonetheless, a possible transfer of power and increase in knowledge of the possible benefits of a flourishing diamond industry may go a long way.

Bottom Line: A comprehensive reform of the Zimbabwean mining laws and policies may lead to a diamond industry that functions as an important driver of economic growth in Zimbabwe. Whether such reform is likely remains arguable.

* Please comment on these posts by students in my growth & development economics course. It really helps if you highlight unclear analysis, alternative perspectives, better data, etc.


Charlotte Moss said...

Hey Max! I really enjoyed reading this post. I like that you gave a historical overview of Zimbabwe’s economic and political situation. This makes your arguments much more coherent, as they’re embedded in the full context. I also like that you challenged the natural resource curse - although we should acknowledge that Zimbabwe and Botswana aren’t similar in every sense, so a positive outcome in one country doesn’t necessarily mean the same will follow in the other.

This post also sparked a great conversation with my Zimbabwean friend! She told me that the diamond industry in her country is very much reminiscent of the film Blood Diamond. So, there are clearly issues that need addressing before we can begin to view the Zimbabwean diamond industry as a viable, relatively sustainable solution to the country’s lack of economic growth. Furthermore, there is a large black market for diamonds in Zimbabwe and a violent environment in the mines themselves, so the government would also need to take these factors into account too.

Realistically, under Mugabe, reform that helps the country as a whole is incredibly unlikely due to the corruption within the government. Then, when he dies, the power struggles regarding who will take over will no doubt be crazy. The political agenda will probably be pretty full for a while. So we might have to look relatively far into the future to see a point where reform is possible. Will it be too late to salvage something by then? Who knows! I’m intrigued to hear what you find with your essay though :) Good luck with it!

Charlotte van der Borg said...

Hey Max,
Thank you for your post, I really enjoyed it!
I would just like to add some information on the resource curse, which may be interesting for you to look at in your paper. Firstly, as you point out, resource windfalls usually have a negative effect on economic growth, which could be avoided with good governance. However, when exploring this argument, keep in mind that the one of the reasons why resource rents lead to worse economic growth, is because this sector (which usually does not employ many people) crowds out other sectors, leading to an appreciation of the exchange rate. Sometimes not even relatively good governance can prevent this. As you probably know, ‘Dutch disease’ is a term frequently used in resource curse literature to describe this, and stems from the Dutch experience after the discovery of natural gas in Groningen. Showing that even the Netherlands was a victim to the resource curse at some point ;)
Moreover, on the point you make that for natural resources to have a positive effect on economic growth, the Zimbabwean government would have to change drastically, which is problematic with the elites in place now benefitting from the current arrangement. I would just point you to the literature that explains why resource rents have a negative effect on democracy (Have a look at Ross 2001 'Does Oil Hinder Democracy?' or Van der Ploeg 2011 ‘Natural Resources: Curse or Blessing?) to add a bit more nuance as to the problems of political reform. This area of literature gives you more insight as to what elites may do to stop the calls for democracy. For example, political elites may decrease taxes (the taxation effect) or increase spending on society (the spending effect) with the resource rents. This keeps the people happy, and the government unaccountable. Maybe this literature may be interesting to add, when you are evaluating the possibility of Zimbabwe ever becoming an example of how rents can be a blessing, instead of a curse.

Max said...

Hey Charlotte,

Thank you for your feedback on my blogpost, I really appreciate it. You are right that the current situation in Zimbabwe's mines is dire, and there is a plethora of issues that must be addressed before the we can view the diamond industry as a viable solution to Zimbabwe's lack of economic growth. However, I think it is important to keep discussing all the possible solutions to the problems Zimbabwe is facing whether they are directly viable or not. I am definitely not claiming to have found the solution to these problems. Again, thank you for your feedback!

Max said...

Hey Charlotte,

Thank you for your feedback, and for pointing out some reference materials, it's really appreciated! In my paper I will definitely take up a more nuanced view of the possible negative effects of a resource curse (there are many).

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