A New Export and Research Product: The Kimberley Process
May 15, 03Success begets success. Washington policy makers and international organizations (such as the World Bank) have “discovered” the Kimberley Process and are now exploring whether the system can be effectively applied to other commodities as well. Suddenly, academicians and theoreticians are studying the experience of the diamond market drawing some intriguing conclusions. World Bank researchers focus on the effect of a Kimberley type of process on prices.
It is argued “realistically, the effect of better regulation of commodity markets is not literally to shut rebel organizations out of markets, but to make their activities so difficult that they can only sell their illegal booty at a deep price discount.” This is certainly true for the diamond industry: we are aware of some recent parcels of rough recently offered (in Paris) without certificates, and there were no buyers!
The World Bank finds “that for countries that are heavily dependent on commodity exports, the world price of these commodities significantly affects the duration of the conflict: when prices are high the conflict is less likely to end than when prices are low. For example, for a country for which primary commodity exports account for 30 percent of GDP, a 10 percent decline in the price of its export commodities tends to shorten the expected duration of conflict by around 12 percent.
The effect of targeted policies should be considerably greater than this, because they detach the price rebels receive from the world price. Potentially, creating deep price discounts and monitoring them should be feasible. An analogy is the deep discounts that are already routine for counterfeit goods.”
To the diamond industry that conclusion doesn’t give much comfort. (“If prices of diamonds fall steeply enough, it isn’t worth it for the rebels to sustain the conflict activity.”) World Diamond Council chief Eli Izhakoff has, at a Washington policy making conference, stated that the Kimberley Process was successful in helping to end the wars in Angola and Sierra Leone.
Though this writer doesn’t believe that the industry should claim responsibility for the demise of Savimbi, it is interesting that the academic world is giving the diamond industry (and De Beers) considerable credit for its role in ending these conflicts. And the credit is given to industry, rather than governments.
Writes the World Bank report: “To date the Kimberley process is the most important example of international action to reduce rebel organizations’ access to commodity markets. It was triggered by the Fowler Report of the UN, which drew world attention to the way in which some rebel organizations were financing their activities through the sale of diamonds and provided explicit detail about the routes involved.
The Kimberley process is a private sector initiative. It was able to overcome the usual collective action problems with private sector self-regulation because the industry is unusually highly concentrated, with de Beers in a dominant position. Although the agreement itself is recent, its antecedents included de Beers’ decision to cease purchasing diamonds in the open market and intensive action by the Diamonds High Council, based in Antwerp, to reduce rebel access to the market.”
Kimberley was premised on the belief that it could lead to the end of conflicts. Writes the World Bank: “This proved percipient: over the next two years both UNITA and the RUF were defeated militarily, although both had previously been highly durable organizations. Note that in both cases other important factors were also at work: in Angola the government used the opportunity of high oil prices to massively increase its military expenditure, and in Sierra Leone the British government sent in substantial military forces. The tightening of the financial jugular complemented these changes, and probably no single component was decisive.
Establishing whether the Kimberley process is going to be effective is important, and for this a monitoring and evaluation process is needed. If the Kimberley process is ineffective, public action will probably be necessary to strengthen self-regulation. Indeed, the very existence of the Kimberley process is an acknowledgment of the need to regulate access to the diamonds market.”
The latter conclusion, namely that the “very existence of the process” proves that there is a need to “regulate access” to the diamond market is not something we would unhesitatingly endorse, but the fact is that the diamond market will have to live with ever more government controls.
If the Kimberley Process is effective, the question arises whether it should be replicated in a few other commodity markets, such as timber and coltan. Although the timber industry is much less concentrated than the diamond industry, the commodity itself is inherently easier to track while in transit. Timber is at the opposite end of the concentration spectrum from diamonds and involves many small companies.
Here the most successful action to date has been at the regional level, something that was brought about by Global Witness. Yes, it is sometimes forgotten that Global Witness, which Nicky Oppenheimer has credited as “drawing the problem to the attention of the industry”, started out with fighting the illegal timber trade in Cambodia. When the government of Thailand increased scrutiny of the border trade in illegal timber with Cambodia that was financing the Khmer Rouge, those actions was so successful that it substantially accounted for the collapse of the Khmer Rouge.
The researchers make some suggestions that make me shiver. One of the thoughts in the research says, “if a price discount on a commodity shortens the duration of conflicts, it may be worthwhile to investigate how prices can be effectively reduced.” We recommend that these are research projects that should be carried out in other commodity sectors, not ours. It is gratifying to see that Kimberley is inspiring research and that the model is though to be applicable in other conflicts involving other commodities.
This development is, however, also wrought with some danger. The World Bank researchers point out that “another activity of enormous importance to rebel groups is the production of illegal drugs for sale in rich countries. Current OECD policy toward these drugs varies, but its main thrust is to encourage the governments of developing countries to discourage production. The problem with this production-focused approach is that it makes territory outside the control of a recognized government enormously valuable, and so inadvertently helps to sustain rebellion. An alternative approach that would radically reduce the funding for rebellion would be to focus penalties on illegal consumption so as to bring down the price of illegal drugs.”
Here we see again the same thought pattern: the system would be more effective if the product price was reduced. We don’t like that train of thought – at least not for the diamond world.
But Kimberley is now operating, considered successful, and considered worthy of imitating. And that is something the industry should be proud of – even though we don’t know how it will develop further.
We have said before, and will say it again, that at the end of the day no diamond will cross borders without paperwork. And that it will happen when there are no diamonds anywhere in the world that still fuel conflicts.