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.