The spread of
economic ideology is truly fascinating. For years now the Competition authorities of
Namibia and Botswana and the entire African continent for that
matter have been trying to spread the good book of the free market. Just get rid
of cartels, which are associations of companies that act to limit competition
and maintain prices above what would otherwise be market levels, and we will
reach the nirvana of free markets and free trade. However, nothing could be
more wrong in the case of Namibia and Botswana.
Recently the Namibian
competition Authority acting chief executiveMrVitalisNdalikokule, said the
commission will continue fighting cartels operating in the country's economy.
He has commissioned an essay writing competition for Namibian students to
explain that Hallelujah , the market is good and cartels are the viscous nasty
enemy of the free market that we all
believe in. If MrNdaalikoukule really wants to tackle anti-competitive
practices then perhaps he should start with the country’s biggest firm De
Beers. But perhaps MrNdaalikoukulewouldsimply prefer to keep hisjob and leave
De Beers alone.
For 90 years until about 2002
De Beers maintained what is widely regarded in economics as the world’s most effective cartel. The De Beers
Central Selling Organization maintained strict control of the supply of
diamonds and severely punished anyone who tried to get in their way. Ask diamantaire Lev Leviev or those who managed
diamonds in Mbotu’s Zaire or even the Soviets how effective they were in
policing the global diamond market to make sure they maximized profits and they
will tell how good they were at their job. With the massive profits accumulated
by De beers in the 19th century Cecil Rhodes,thegrand father of all
African war lords and the the founder of the De beers cartel, plundered Zimbabwe all in the name of British
civilization.
So how can anyone say that De Beers
was good for Namibia and Botswana. Most of the profits in the diamond value chain
come from mining and De Beers protected
the value of its assets ie the mines. In 1900 there were 1 Mcts of diamonds
mined. Global diamond production peaked in 2005 at 176Mcts. So how can a
product which has increased so enormously in supply maintain its market value?
While commercially valuable deposits of diamonds are very rare, diamonds are nothing more than a
semi-precious stone in terms of absolute scarcity. But diamonds are certainly not a semi-precious stone in terms of price. What makes them valuable and what made
Namibia and Botswana, as important global producers, as rich as they are today is the very cartel
that competition authorities would like to
destroy. The cartel engaged in what was voted the 20th century’s
most successful marketing campaign
‘Diamonds are forever’ , diamonds are a girls’ best friend etc etc. This
really worked and after World war II De
Beers convinced the average American that they had to part company with two months’
salary to show their intended that they really loved them. But perhaps even
more stunning has been the incredible success of De Beers in the 21st century in convincing
Indian and Chinese women in the merging middle classes that diamonds are to be
preferred to gold and jade as parts of the wedding exchange. It is with this
marketing success in emerging Asian markets that De beers maintained the export value of
Namibia and Botswana’s diamonds and hence the nation’s prosperity .
Of course there is no longer a
cartel in the diamond industry because there is no longer any need for the CSO because
after 2002 De Beers embarked upon the ‘Supplier of Choice’ marketing strategy
which saw the company move to those parts of the value chain where serious
profits are made ie. Mining where it had been for over 120 years and into
luxury marketing in a partnership with LVMH. If the reported published accounts
of De Beers are to be believed then this was the biggest flop in the history of
the diamond industry. Up till 2014 the company was reported to be losing
money. But there is no cartel in the
diamond industry now because, as the IMF has recently written Botswana, the
junior partner (Botswana owns 15% of De Beers) but dominant supplier of De beers diamonds ( 65%), is now the buffer in the global diamond
market. When there is excess production there is no need for the old CSO to use
up scarce working capital and buy up the excess when you get just Botswana to
cut supply and do, in effect, the same
thing. De beers has declined from 80-90% of the world market for diamonds in
the mid 1990’s to less than 40% now but it is still the dominant firm in the
industry and its supposedly secret prices are the most important commercial
artefact in the diamond market. Despite all of the apparent competitive
trappings in the industry it remain highly concentrated and run by De beers
which is a powerful and dominant oligopoly.
Namibia exports some of the best
and most valuable diamonds in the world. If you look at the most Kimberly
Process statistics the export price is amongst the highest in the world.In 2013
Namibia exported diamonds at an average price of US$550 per carat while Botswana
was receiving only $137/carat. Those diamonds would certainly not be as anywhere
as valuable as they are today had it not been for the De Beers cartel/market
power and its continued domination of
the global diamond market and its assurance that the consumer continues to
believe in the long term scarcity of diamonds.
So what may be true when you are the consumer of the products of a
cartel is completely wrong when we are the beneficiaries of that cartel. So
MrNdaalikoukule, cartels are wonderful
as long as you are not the receiving end of the cartel price.
These are the views of Professor Roman Grynberg and not necessarily UNAM where he is employed.
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