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Diamonds and oil are more trouble than they are worth

09 september 2009

John Steinbeck, in a novel called The Pearl, tells the story of a poor Mexican farmer Kino, who happens to find a very big pearl, writes Vivek Kaul on "It is the pearl of the world," Kino declares.

"Every man suddenly became related to Kino's pearl and Kino's pearl went into the dreams, the speculations, the schemes, the plans, the futures, the wishes, the needs, the lusts, the hungers of everyone, and only one person stood in the way and that was Kino, so that he became every man's enemy," writes Steinbeck. People try to cheat him. He is attacked and he flees to a bigger city to try to sell the pearl. The thieves follow him and kill his son.

Alan Beattie, the trade editor of the Financial Times, recounts this story in his book False Economy - A Surprising Economic History of the World. The point he is trying to make in the book is that many countries being apparently blessed with lucky gifts of rare and precious minerals, also find themselves worse off for having found them.

"Like the pearl, the discovery of oil or diamonds induces envy and greed, turns traders into thieves and business people into bounty-hunters, encourages rivalry over co-operation and in the end, often causes more harm than good to the finder," he writes.

The dominance of oil and gas in an economy weakens democracy. Beattie cites the example of Africa. "It is no coincidence that the four longest serving rulers, in Africa, all autocrats, are from oil zones. Their governments do little more than keep themselves in power, being frequently embroiled in armed conflict, and certainly deliver very little to their citizens"

The Middle East, which is high on oil, is also pretty low on democracy. Countries rich in natural resources "have the characteristics associated with conflict, such as poverty and low growth, and are much more likely to break into a civil war."

"Joan Savimibi, the leader of the rebel movement UNITA in Angola, ran what was in effect an alternate state in the jungle for nearly 20 years. He fought a civil war that began as soon as Angola gained independence from Portugal in 1975. He continued fighting, with occasional breaks for both elections and peace accords, until his death in 2002," he writes.

Natural resources are great resources for funding a civil war. "Diamonds, in particular, are a near-perfect mineral with which to fund freelance rebel movements or alternate governments. They act almost like a global currency, being small and light and holding their value well. Despite the attempts of an international campaign, the Kimberly Process, to register their source, they are very hard to trace.

The Sierra Leone civil war dragged on for a decade from 1991 after the Revolutionary United Front, the main rebel movement, gained control of diamond mines and used the wealth to fund their operations,' writes Beattie.

Other than war, countries that are high on natural resources can also suffer from the Dutch disease. "The malady refers to the Netherlands in the mid-1970s. The soaring price of oil and gas made the country's gas deposits...into a valuable export. Money to buy gas flooded into the country from all over, and as the dollars, francs, Deuthschmarks and yen were changed into guilders, the Dutch national currency, the exchange rate rose.

This made other Dutch exports uncompetitive. A thousand guilders' worth of tulips would have cost a London wholesaler £665 in January 1970, but by December 1979 she would have had to shell out £1168," writes Beattie.

With tulips becoming more expensive internationally, the sales fell, which led to rising unemployment given that the tulip-growing employed more people than the gas industry. This is primarily because "in extractive industries, the process tends to be very capital intensive, employing many more machines than people."

"Oil and gas extraction generally requires giant, high technology drills, offshore platforms and vast systems of pipelines operated by a relatively small number of employees," writes Beattie.

This job-light mode of development has other implications other than economic. Beattie point outs that, "the oil-rich Middle East, for example, is full of young men living in economies that appear fairly successful. Saudi Arabia, for example, has a per capital income of nearly $15,000, and is in the top third in global rankings.

Yet it's true that unemployment rate is estimated at up to 25% and is concentrated among the young. And since its demographic profile is weighted towards youth - half of Saudi males are in the age group of 22 years or less - the country has a large and factitious constituency of the type that has proved vulnerable to the appeal of radical Islamism."

The way out of these problems is to diversify the economy into other areas like Dubai has done. "Having long developed a role as a trading post, with a good deal of smuggling of gold and other contraband to India on the side, Dubai managed to expand this, becoming a banking and finance hub. It has added tourism and even a cluster of biotechnology research from scratch," writes Beattie.

Nevertheless, even this diversification does not work at times. Take the case of copper-rich Zambia, where efforts to diversify came a cropper. As Beattie writes, "Zambians had rightly been rely less on copper. They had responded with an industry growing flowers, fruits and vegetables to fly to European supermarkets."

However, as copper exports picked up, the Zambian currency kwacha also rose in value. "In other words, the rise in copper price and hence the currency meant that a collection of brand-new high-value labour-intensive export businesses, whose benefits were mainly paid to Zambians in kwacha, were being threatened by long-established presence of dangerous, dirty mines where profits, capital investments and wages left the country to be handed over to foreigners in dollars, pounds, rupees and yuan. A more poignant example of Dutch disease would be hard to invent."