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How I understand the economics of drugs and diamonds

Posted by Chris on September 17, 2007

This is a tangent I went on while writing about a recent special on the History Channel on conflict diamonds.

I was addressing why terrorists and revolutionaries would look to both diamonds and illegal drugs to fund their military operations. A similarity between diamonds and illegal drugs is that both do not operate in free-market, free-trade environments. I’m making no argument here about them being equal, ethically speaking. Wearing a diamond is not akin to using drugs. You could draw up more similarities (both give some kind of “high”) but that would be missing the larger point that the end result of diamonds would be to bring joy/show love, whereas the end result of drugs, while perhaps bringing some joy, largely reap destruction.

The difference, economically, is that drugs have governmental regulations that open up a black market, whereas diamonds have black markets because there is a monopoly and because we make moral distinctions between diamonds based on the source, conditions in which they are mined, etc…
So I say that diamonds do not operate in a free trade environment because there is not competition. If there was, well, it’d probably be a moot conversation—competition would drive down prices, which I believe would drive down the desire to buy diamonds. Much of the reason they have high perceived value is because they have high price—not due to scarcity in nature, but scarcity in supply. De Beers, as a monopoly, regulates the supply to ensure that high prices and high profit margins remain. This explains why they would buy ANY and ALL diamonds during the 1990s—they had to ensure that the market was not flooded. To their credit, they did not buy conflict diamonds after they knew about it. But I doubt they were asking a lot of questions before then.

Anyway, diamonds are what is known as an inelastic good, at least, I see it that way (meaning that higher price = higher demand. most things we buy are elastic, meaning the lower the price, the higher the demand). Maybe a better statement would be to say that jewelry in general is inelastic, once you get past a certain age/income level. A 13 year old will buy the cheapest fake gold bling he can find. The rest of us would be turned off by a $100 price tag on a diamond ring. Even though that would probably be well above the actual “cost.”

Coincidentally, I had just read an article on whether or not terrorists use drug money to fund their plots, and why they would do so. It can be found here. The author is making the argument in favor of the legalization of drugs, in that it would lower places and eliminate the profits of black markets.

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Another “Blood Diamond”

Posted by Chris on September 17, 2007

The other day I watched a two-hour special (not sure it could be called a documentary, as cultured as that would make me look) on the History Channel called “Blood Diamonds.” I am not sure exactly when it was made but it seemed very current and my guess is that sharing the title with the movie was no coincidence.

I really enjoyed this show and learned several large pieces of the diamond puzzle that I did not yet know.

1) I did know how conflict diamonds worked in Sierra Leone. Here’s the abridged history that I knew: Sierra Leone has diamonds. Liberia does not. Yet, at one time, Liberia had millions of dollars in diamond exports. These diamonds came from Sierra Leone as a result of illicit, black-market trading. They are called “conflict” diamonds because it is armies on one side of a conflict that use the diamonds to fund their operation.

What I learned was the connection between Liberia and Sierra Leone (SL). I mean, the SL diamonds could have been funneled out to any country, right? But the RUF (SL revolutionaries) was in partnership with Charles Taylor, eventual dictatorial leader who was to take over Liberia. Taylor used the diamond money to fund his own revolution in Liberia while RUF fought its war in SL. I had heard of Taylor and that he was a bad guy, I never knew the details of the connection between he and SL/RUF.

2) The conflict in Sierra Leone was still ongoing when the rest of the world awoke to the state of the diamond trade. I had always assumed it was discovered after the fact.

3) There is a purported link between Al Qa’eda and the RUF, and therefore, an alleged connection between 9/11 and conflict diamonds. This should be the most shocking [alleged] fact. I keep saying alleged because the CIA and FBI didn’t [want to?] see much of a connection. However, Congress made them investigate it anyway. The CIA returned a report stating that there was no evidence that Al Qa’eda funded itself through the black market diamond trade. Of course, the film offered compelling evidence. Apparently, the allegations started when a guy involved in diamonds saw pictures of the US most wanted from 9/11 and said, “hey, I know some of those guys, they just bought some diamonds from me.”

To make a little more sense of this… why would Al Qa’eda (AQ) have anything to do with diamonds? Well, you know that the Taliban oversaw the growth of opium poppies (used to make heroin) in Afghanistan, right? There is a common link in that both have thriving black markets. I went on a tangent about the basic economics of diamonds and drugs, at least as I understand and can explain it. Rather than get too off topic, I posted that HERE.

According to the film, the US froze AQ’s assets after the US Embassy bombings in East Africa. So, whatever ability AQ had to do “legitimate” financial dealings, I’m guessing it was taken away after that. Just as a rebel army would not be able to open bank accounts and get a license to buy guns from the government against which it is revolting. I just read an interesting article the other day, very timely now that I’m writing on this, about why terrorists get involved in drugs. Much of the reason is due to the high profit margin of drugs. If the Taliban built factories to build widgets and sold them to China for 50 cents apiece… well, that is just not as good of a deal as selling opium for however much that is.

AQ could offer the RUF guns and military goods in exchange for the diamonds it could sell for a very large profit. Altruistic terrorists, engaging one another in the globalized economy—it’s almost sweet isn’t it?

Hopefully that explains, without too much incorrect information and in simple enough terms, why AQ or a group like it would be involved in the diamond trade.

Now, to come back briefly to the first two things I learned. There were two quotes from the special that I want to share. The first is from a public affairs guy from De Beers:

We looked at [what was going on in Sierra Leone] and we were shocked. Diamonds should not be a part of it, about that we were adamant. De Beers wanted to be part of the solution.

I would hope not. This is a “what do you want, a cookie? That’s what you’re supposed to do” situation (Chris Rock joke). De Beers solution was to disengage from the Sierra Leone/Liberia market and eventually cooperate in the development of the Kimberley Process, which identifies conflict-free diamonds.

But here’s my more cynical response: Diamonds should not be a part of it, but they are. It’s unfortunate, but, in a way, you started it. The first Mr. Oppenheimer bought all the diamond mines in South Africa in order that he might limit supply and drive up prices. This does not offend my moral or business sensibilities. However, when combined with the fact that for most of its years managing the business, diamonds were mined at the expense of Africans, and its snazzy marketing campaigns (“Diamonds are forever”) that created a larger market for a product that no one needs to survive, I find no problem criticizing them. It blows my mind that people will delay engagement and marriage in America because custom calls that the diamond equal so many months of income. I will not insult anyone’s choice to buy a diamond but I will say that that is a very superficial custom. It is essentially the American version of the dowry, or bride price. If you want to pay it, fine, but let’s not exacerbate the marriage problem we have in this country, that says all these certain things are integral to marriage when they really are not. And let’s not be overly sentimental about it! Your Great-Grandmother didn’t do it that way. The thought would not have crossed her mind.

The second quote is from someone from one of the NGOs that helped raise awareness about conflict diamonds:

Conflict diamonds could pop up at any time. Africa is a volatile region… the root causes have no been addressed: corruption, poverty, [etc…]

He argues that we cannot think that the Kimberley Process, and the current state of affairs, means that conflict diamonds are a thing of the past. One element that is missing is a civil war in the right geographical region. The root causes for revolutions have not been solved. The market conditions that make a black market diamond trade profitable still exist. It is probably good if we continue to take all the steps to avoid conflict diamonds in the marketplace that we would take if we knew that terrorist groups were trying to use them to fund their evil deeds.

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Links about the diamond conflict

Posted by Chris on December 15, 2006

The Ecologist magazine

http://www.theecologist.org/archive_detail.asp?content_id=220 “Janine Roberts describes how De Beers cons the world into paying so much for its cheap, plentiful diamonds and turns a blind eye to the eradication of the oldest culture on the planet.”

http://www.theecologist.org/archive_detail.asp?content_id=220

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the Diamond Debate part 2- my email to diamondfacts.org

Posted by Chris on December 15, 2006

This page on the diamondfacts.org “answers” some “popular questions” and allegations towards the industry. I use quotes not because they did, but because I do not believe they give great answers (and certainly not very long ones) or that they address many questions. They basically answer a bunch of similar questions about the conflict diamond. But oh, there are lots of other fun things they are criticized for as well!
Anyway, they invite the reader to write with additional questions. These are mine:

Why didn’t the diamond industry themselves take measures to prevent the conflict diamond problem long before it became so ingrained in some African wars?

What are the policies in place to determine how many diamonds to hold in reserves and how many to release to the market?

Is this co-ordinated by WDC (World Diamond Council) or just by each individual company?

You comment on the indirect economic benefits of the diamond industry as itpertains to revenues being used for development or a country like Botswanafunding education. What about answers to allegations about poor working conditions and low wages?

Please consider responding to my questions on your site.
(Update, Feb 13, 2007: I have not received a reply, nor do i notice any discernable differences on the web site. I re-sent the email/questions).

(Update, April 23: I re-sent the email/questions again).

(Update, August 13: I re-sent the email/questions again).

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the Diamond Debate 2006 part 1- How Blood Diamond has me interested again…

Posted by Chris on December 15, 2006

I just saw Blood Diamond last night. Those of you that know me would not be surprised, since hearing my obnoxious proclamations my freshmen year that I would not be buying my wife a diamond, to my more sober and humble explanation my sophomore year that was less about me being cheap and much more about exploitation, consumerism, and a call of my conscience. Since then, however, the issue has not been in the forefront of my mind unless it came up in a conversation my stance, or if someone heard from someone else, and I felt the need to give an explanation.

Until now. I was pleasantly surprised when I saw my first commercial for this movie. I don’t go see movies often (read: 2 or 3 a year) and did not necessarily plan to go watch it. But then I saw a cnn.com video explaining that the diamond industry had already prepared a response, diamondfacts.org, prior to the movie’s release. I heard Leo DiCaprio talking about the movie. Most importantly to this process, the Bushmen of the Kalihari reappeared in the news, asking for DiCaprio’s help in their legal battle to be returned to their traditional lands in Botswana. My sophomore year, I had read a powerful article on the Bushmen’s plight in the Ecologist magazine (which you can read here). I was astonished this matter had not been decided years before. And a few days ago it was announced that the Bushmen won their case! Unbelievable, a beautiful surprise.

All these things came together to give me a strong desire to go see the movie and that’s how I ended up there last night. I am no critic by any means, but I will say that I thought DiCaprio and Djimon Hounsou were excellent. Hounsou I think was also in Gladiator. He’s a great actor, I’d like to see him do more movies like this (not to typecast him, but, to be in movies with an African or epic setting). I hope Hounsou wins an Oscar, he probably wouldn’t get a best actor nod but really did much more than your average supporting actor.

The movie was really good in my opinion. I was slightly annoyed at the underlying love story and almost thought the movie was going to end terribly but it did not. It is a violent movie- but that violence is not unrealistic or unprecedented. Because of my sensitivity to the diamond issue, I honestly watched the movie like it was real. I thought the rest of the night, and when I woke up, about Solomon Vandy and Dia his son and what they went through (Hounsou plays Vandy). I did not find it to go the route of sensationalism- yes, these things are sensational, but real. I fully believe that the diamond industry was complicit in willful ignorance (at best) to allowing blood diamonds to be sold prior to the recent reforms. It was no secret what was happening to the people who were living it.
This kind of movie leaves me paralyzed. I see stuff like this and I’m so angry! I feel so useless! I just want to go to the airport and hop a plane and go do something, but what? The next entry will include a simple response I made to the diamond facts web site. A third entry will include some thoughts on what I think we can do as Americans/consumers/young adults/people with relatively no influence, besides writing in to an anonymous web site email address. And I’ll make a fourth entry that I’ll continually update with links to articles on diamond issues.

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