I was eager to listen to President Mogae’s speech. And I came away with great respect for this remarkably articulate, Oxford educated African leader and his country.

The president first cited the resource curse — when natural resources are exploited, the process often leads to “rent seeking” behavior. Surprisingly, the resource curse never hit Botswana. And that is because mineral rights are vested in the state.

“The quest for natural resources is fueled by greed for money, which is then used to buy political power,” said the president when talking about other African states. But the exact opposite is true in Botswana. In fact, the country is one of the founders of the Kimberley Process that ensures transparency in the use of its diamonds.

And that is why Botswana has never been involved in conflict diamonds. Mogae said, “It is ironic that the very diamonds long known as a symbol of love and affection are now used for purposes other than love and affection.” Then he added, “One conflict diamond is one too many.” He went on to point out that Botswana contributes to a significant percentage of global diamond output and is committed to manufacturing clean diamonds and also eliminate conflict diamonds from the marketplace.

An Unusually Happy Marriage?

With any resource, the collaboration between local governments and large multi-nation corporations is important. But often, this marriage is not without trouble. Take Bolivia, for example. With its vast oil resource, the Bolivian government now wants a larger part of the proceeds. This has resulted in a crippling conflict between the government and the private sector.

Not so in Botswana. President Mogae pointed out a simple fact: “Botswana is a diamond dependant country. And De Beers is a diamond company. We need each other. What’s good for De Beers is good for Botswana.

“Botswana doesn’t discriminate against De Beers for taxes. They pay a 15% royalty plus the going corporate tax. The result is a very large and very healthy revenue from diamond mining.”

Another important reason why the marriage between Botswana’s government and De Beers is this long-lasting relationship was established even before the country started mining diamonds. Minerals were vested in the state, but the mining process was not. This meant the private sector was in control of the mining and the state did not run the mines. And this hands-off approach worked.

Diamonds Aren’t Oil

When a foreign company invests in a nation’s oil, it can recover its initial investment pretty quickly. Compare that to diamonds where the recovery period is longer. That means labor relations are critical.

There is always a crucial negotiation process once the mining companies have recovered their costs. Take Kazakhstan, when large oil companies entered the country for its natural resource. But once their initial costs were recovered, they went into a renegotiation process. As with many countries with a preious natural resource, this renegotiation process was bloody.

Botswana too had to renegotiate with De Beers several times. But the process was always amicable. “Natural resources aren’t the critical variable,” points out Mogae. “It’s honest government and excellent negotiators that make the difference.”

Talking about the success of their negotiations with De Beers, the president said “Negotiations with De Beers were tough. But we are aware of our limited technical competence. So we have a team of foreign advisors.”

Then the president commented on his government’s attitude towards their vast diamond hoard: “We are neither emotional not ignorant.”

Corruption and the Resource Curse

When asked about corruption in his country, President Mogae said it and the resource curse are connected. Botswana’s transparency is no accident. He mentioned that “democracy is the greatest safe guard against corruption. And a free press is necessary.

“Of course, there is an element of luck that our original leaders were not corrupt. Today, Botswana has an anti-corruption agency that works with the president’s office and the Auditor General.

“Also, free opposition and free press are constitutionally entrenched.”

Policy Wishlist

Center for Economic Development founder and economist Nancy Birdsall asked President Mogae about his wish list for policy on Capitol Hill.

He mentioned an unusual problem. Although a developing country, Botswana does not qualify for any concessional financing because its per capita national income is too high!

This is also the case with AGOA — the African Growth and Opportunities Act, by which African countries can export to the U.S. duty free. However, Botswana was not eligible due to its high per capita national income and had to lobby hard just to be included.

“The fact that we are a landlocked, semi-arid, HIV-stricken country is reason enough for concession assistance,” said the president.

“Diamonds Don’t Go Bad Like Milk”

President Mogae pointed out that diamonds are non-perishable. This means conflict diamonds can be stockpiled and let into the market at any time. That is one way to wash the blood off the diamonds.

While expressing concern over Africa’s conflict diamonds, the president also stressed that conflict in Africa is not always related to natural resources. “Look at Rwanda and Darfur. There are no resources or diamonds there. Those are deep seated historic conflicts and they are not diamond related.”

While the natural resource curse and the prevalence of conflict diamonds are both very real problems, here is a nation that rose above all conflict and above all curses. And they beat all odds through honest governance. As Nancy Birdsall said, Botswana is a “remarkable country with remarkable success.”

Regards,
Sala
October 20, 2006

Investing in Diamonds was originally featured in the Penny Sleuth.