So Why are you Unemployed?

So why are you Unemployed?

When I left university in Australia  forty years ago with a degree in Economics I had nine job offers within the first week. Fast forward  to Gaborone today while you are definitely more likely to get a job with a degree than without, there are now some 5,000 graduates waiting for internship with the Ministry of Labour. Different country and a vastly different time you say. While most university graduates still eventually get jobs, where I work we have an increasing flow of very bright and intelligent young Batswana university graduates who come to work on internships, often for as long as two years for nothing more than P1,300 per month.

I really began to panic early last year when a young and very enthusiastic Motswana with a degree in mining engineering from Queens University in Canada came to work for us. Queens has one of the best engineering and mining schools in North America. So when someone with a good degree from an excellent university comes home because he wants to serve his country and not stay in Canada but has to take an internship then we have real reason to fear and be concerned with what is happening to the country. Eventually the young man got a good job with BCL and I have no doubt will make an excellent contribution to the nation’s development. But equally I have many bright young UB graduates who I have trained on this program who  after two years have found no job and have had no choice to go back to the cattle post in Shakawe and Bobonong. These are deeply embittered young people who feel that life and  government has failed them.

So what changed ?

Not only the Kalahari and the Indian Ocean, but a whole lifetime stands between my experience of looking for a job in Australia in the 1970’s and that of the current generation of Batswana university graduates. The easy answer to explaining the difference is that, that was Australia and this is Botswana but that answer is just completely wrong because in 1974 as Africa was freeing itself from the shackles of colonialism there were still many good jobs for university graduates. But many if not all those jobs were in government as new ministries opened up, young people who could perform, and many who could not, got jobs for life in the new post-independence public service. There were not enough people to fill these vacancies. What has really changed is not the place but the passage of time- that cruel and insensitive monster that eventually kills us all.  

The post-independence African model of development that emerged in so many countries, including Botswana, was based on extractive industries. Foreign investors would develop mines or agriculture, the government would tax them and the revenues would be used to hire university graduates. Of course this model was limited by how much natural resources you had and  how much your government officials stole from the revenue. Botswana was blessed in that at the beginning it had one of the richest resources in Africa i.e. the diamond mines, a good  share of the revenue from De Beers and a post independence government that did not plunder its people. It is for this reason that the government has until very recently remained one of the most important employers of university graduates. But as government revenues stagnate then this model is failing and we will replicate what happened to the rest of Africa much earlier.

In comes Reagan and Thatcher

When I arrived in Tanzania in 1979 to teach Economics at the University of Dar Es Salaam the strains of the old African development model were starting to show. Following Tanzania’s horrendously expensive invasion of Uganda to oust, the dictator Idi Amin the government of Tanzania began to run out of foreign exchange. The state owned factories that had been established under ‘Ujamaa socialism’ by President Julius Nyerere collapsed and there was nothing in the shops – no sugar, no bread, no maize and painfully, no beer. Tanzania soon collapsed into what we called a ‘hunter- gatherer society’ where everyone spent their time hunting for food and basics and not doing their job.

The same  free market ideology that brought Margret Thatcher and Ronald Reagan to power in the UK and the USA in 1979/80 began to affect Africa directly through the complete domination of the free market, trickle down thinking in the World Bank and the International Monetary Fund at around the same time.   No need for government intervention, the market would solve the problem. Cut government spending, open up markets to international trade get rid of marketing bodies and all would be well. According to this economic philosophy the private sector would step in and do the job that government could not do effectively but it didn’t. This was the so-called ‘Washington consensus’ that dominated what passed for economic thinking for nearly 30 years.  Tanzania  implemented just such a set of reforms in the 1980’s and a whole generation of young graduates that had previously been assured government jobs for life soon  found themselves selling second hand clothes  in the market.

Homo Davos

Fast forward to today and the ‘masters of the universe’ met last week  in Davos, Switzerland as they do every winter to sip champagne and discuss how to get even richer and also, amongst other subjects,  how it is that everywhere you look in the world  income distribution has shifted so much in favour of the rich and against the poor.  Davos has become a magnet for international organisations desperate to attract the attention of the masters of the universe According to Oxfam the top 1% of the world’s population  owned 44%  of the world’s wealth (e.g. houses, shares and other assets) in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%. Oxfam suggested that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.. The International Labour Orgaisation  also published a report showing that global unemployment is now at 200 million and will  continue to rise to 212 million to 2020. The ILO has also predicted that income ( ie. what you earn every year) inequality will also continue to widen and that globally the richest 10% earn 30-40% of total income while the poorest 10% earn around 2% of total income.

The answer as to why this happened lies very much in the world many of these very same people at Davos shaped over the last three decades. When one listens to their debates and discussions on inequality one would think that they were on another planet when all this was happening rather than at the very forefront of the rising inequality.

Part of the reason why the rich get richer is the same reason why I have so many unemployed graduates. The world moved on, we implemented a globalization where trade would occur not in nation states but along global value chains where production was located in the lowest cost locations. The old unionised automobile workers in Canada and the US who in the 1970’s had two cars, a comfortable home for their families as well as a cottage by the lake seems like  a remote memory of a now distant and almost extinct world. Those jobs have moved on to Asia and Latin America, real wages in North America have been pushed downwards and those workers in Asia certainly became better off but those in North America have generally not become much better off and many became much worse off falling into low paid jobs in the service sector ie. KFC. It is these people which are called ‘the middle class’ in America that paid for the uplifting  of Asian workers. The wealth trickled down but mostly it trickled up to  those who owned the factories who became so much richer because of globalization and their ability to make use of much cheaper Asian labour.

But to blame trade liberalization and globalization is not quite right. Of the nine jobs I was offered at least three that I can think of disappeared eventually because of the new information technology. Most disappeared because the jobs went to Asia. The flexible job market combined with the rapid advance of robotics  and advanced computers will in the coming years mean that some 48% of existing professions can be eliminated with the existing state of technology. And that capacity only increases every year Computers now do everything from driving  giant driverless trucks,  at Australian mines, to   drones which will shortly eliminate delivery trucks. And what is the response of the most economists is … get an education, work   hard, train to be an IT and robotics specialist and there will be plenty of jobs. This rings hollow to the otherwise unemployed IT graduates working here on internships We may one day soon have the chance to ask the unemployed truck drivers from Orapa and Jwaneng what they think of this and whether they can retrain as IT specialists?

19^th Century Ideas in the 21^st.

Global inequality between the rich and poor has increased substantially over the last 40 years to the point where even those in power know they have succeeded beyond their wildest expectations in creating Ronald Reagan’s nightmarish Dickensian world where the rich have amassed vast fortunes and little has trickled down to the poor, at least not those in their own countries. What has certainly changed is that globalization and technical change has created a middle class in China, India and the other developing countries. But those who paid for this middle class are the segments of the American and European working classes ie the ones they call the middle class that is increasingly on the endangered species list.

We need to rethink our 19^th century economics for a new world where the power of computers, robotics and information technology are so great that an ever increasing number of people, including university graduates, will not have anything resembling long term meaningful jobs. And while great wealth will be created from this, an unsustainable misery is now emerging  amongst young people all over the world who are bearing the brunt of this 19^th century social experiment. If humanity does not find a better way to give peoples’ lives meaning and share this great wealth that technology and globalization are creating then it will end badly for us, as we now possess the technology of destruction needed to make the 20^th century fascist wars  and communist revolutions look like rather tepid affairs.

 

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.

 

 

Will Putin crash the Global Diamond Market?

Will Putin crash the Global Diamond Market?

In the mid-1990’s when the Russian Federation was being created out of the ashes of the former Soviet Union, Valdimir Putin’s infamous vodka swilling, bottom pinching predecessor  Boris Yeltsin was involved in a process that was to create the Russian oligarchs who made their fortunes accumulating Russian mineral and energy assets at knockdown prices. In gold, aluminium, nickel, oil and gas Yeltsin allowed the oligarchs to accumulate vast fortunes from disposing of the nation’s assets cheaply.

As the Russian economy  collapsed into an crisis of unparalleled  proportions in the 1990’s in the face of the break-up of the Soviet Union and large sections of the Russian population on fixed incomes such as pensioners slid into grinding and previously unimaginable poverty more and more of the nation’s jewels began to leak onto the global market.

In the early 1990’s De Beers was still king of the global diamond market and almost all countries that discovered new diamond deposits used the De Beers cartel, the Central Selling  organization (CSO) which would  buy up stocks of diamonds that were leaked to shore up the decline in revenues that occurred when the Soviet Union collapsed and became the completely resource dependent exporter that it is today. The leaking of US$1 billion of Russian rough diamonds onto the global market at the time was a serious challenge for De Beers as it had annual sales of USD4.5 billion on average over the period. The evidence is that De Beers seems simply bought up the leaked Russian goods onto the market in order to assure no serious decline in prices.

 In the past De Beers had acted in case of Argyle in Australia and Zaire to punish large companies and countries that tried to operate outside the CSO. De Beers would do this by dumping large quantities of very similar quality diamonds on the market just when the recalcitrants were trying to sell their assets outside the CSO. This depressed prices massively and all though it hurt De Beers, it hurt the chisellers even more because De Beers had deeper pockets and was better able to take the loss. The lesson for everyone in the diamond market, including Botswana, was clear- don’t mess with De Beers because they can seriously undermine any player who acts outside the cartel.

Putin in the Global Economic Crisis

If you fast forward some 15 years you get some indication of just how shrewd Putin could be with the management of diamond resources. In 2008/9 the global diamond market collapsed, prices fell through the floor and there is no more Central Selling Organization as De Beers had dismantled its cartel arrangement in 2000 and moved to a new “Supplier of Choice’ strategy which, while no longer a monopoly, was supposed to maintain its control of the market in other ways.

Without a CSO to buy up excess diamonds the only option was to shut the mines and contract production until the price and demand recovered. That was the De Beers strategy. Mines in Botswana were closed for several months and production decreased in Namibia, South Africa and Canada- countries that are known as the ‘De Beers Zone’. But this was not Putin’s strategy. What he did instead was to in effect guarantee a low but adequate price of diamonds to Alrosa and he instructed Gokhran the Russian Federation’s State Precious Metals and Gems Repository, to buy USD1.2 billion worth of diamonds at the height of the crisis in 2009. In retrospect Putin was astute and two years later Gokhran re-entered the world diamond market selling part of its stockpile that it had reportedly purchased at USD71/carat at approximately USD131/carat. Russia did not lay off its miners and continued producing and its Ministry of Finance made a tidy profit from the transaction.

One can compare this to Botswana where De Beers shut the Jwaneng mine, Botswana  saw its GDP plunge 8% in 2009 and the country went  into significant debt for the first time. Public debt rose from 5.7% of GDP in 2007 to almost 18% in 2013.Botswana borrowed USD1.5 billion in June 2009 from the African Development Bank in order to stabilize the national economy. It is easy enough to conclude that Putin was really clever and the De Beers/Botswana policy was simply short-sighted. But being shrewd requires money and Putin could afford to be clever in 2009 because the Russian Ministry of Finance had revenues from multiple high value minerals and hydrocarbons. Botswana on the other hand only has revenue from diamonds and hence  for Botswana to stockpile diamonds would also have been clever but certainly much riskier because it is far more exposed to the diamond market than the Russian Federation.

The Putin-Modi Diamond Deal

In  early December Putin and Indian PM Modi attended the World Diamond Conference in Dehli, with both leaders keen on ramping up direct exports of diamonds to India. A reported USD 2.1 billion deal was signed with Alrosa for direct exports. India currently exports polished diamonds worth $20 billion and both governments want to see more direct imports. Only about 20% rough diamonds are sold directly from Russia to India and Alrosa  seeking to avoid the potential impact of EU and US sanctions. But Indian diamantaire normally prefer to buy their diamonds through tax-free Dubai or Switzerland where they can transfer price any profits they may have mistakenly declared. Nevertheless, almost immediately after the Russia-India agreement in New Delhi  Indian sightholders at the most recent Gaborone sight of De Beers (DTCB) began giving up their boxes  citing the cheaper goods available from Alrosa than from De Beers and the squeeze on their margins caused by galloping rough prices. It was reported that 25% of the December Gaborone sight remained unsold. In a thoroughly globalized market like diamonds the impact of EU sanctions on Russia is now reverberating through southern Africa.

 Putin in 2015- Boris II?

What Yeltsin faced in 1993 was fundamentally different to the crisis that Putin faced in 2008 and may yet prove to be much more severe than what Putin now faces. Yeltsin faced a complete meltdown of the Russian economy and was desperate for money to stave off economic collapse. This year and next we shall see the stuff from which Putin is made because he will now face a major economic crisis that even he recognizes will last at least two years. Yeltsin pretty well knew that any diamonds that he sold onto the world market behind the back of the De Beers cartel would be bought by the CSO at prices that would not undermine the world diamond market.

But now there is no cartel. In 2013 oil and gas made up 68% of Russian exports and its price has fallen by more than 50% in a year and is trading at less than USD50/barrel. A similar portion of the Russian budget comes from oil and gas revenue. Russia also faces economic sanctions as a result of its annexation of the Crimea and its aggression in Eastern Ukraine. No-one can be certain as to the precise magnitude and duration of the decline of the Russian GDP this year though analysts are predicting a fall of 6% of Russian GDP in 2015. Putin himself believes that the crisis will only last two years. But if the crisis becomes much worse will Putin order an acceleration of production and  export of Russian diamonds to make up for the loss of government revenue? Putin of course knows that there is now no cushion in the diamond market. Since the economic crisis of 2008 De Beers has contracted production in its zone significantly which is one of the main reasons why rough prices have been rising as rapidly as they have during the last five years during the economic crisis.  

But the real long term question is whether Putin is likely to act in the diamond market in the same way as Boris Yeltsin did 20 years ago? In December Russia was reported to have begun selling its gold stockpiles but it is not a significant enough increase to severely effect the gold market. In the diamond market Russia is the world’s largest producer of mined diamonds by volume and unlike gold, any increase in supply would  have profound effects on the global diamond prices. A Russian policy of leaking or dumping diamonds is, at this point,   highly improbable given that there is no longer a CSO and a floor to the diamond price and so Russia is likely to maintain a stable supply situation unless the severity of the economic crisis intensifies to the point where Putin becomes financially desperate and morphs into Boris II? And in such a case the world will have much more to worry about than just the price of diamonds.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.

 

 

 

 

 

Knowing the future and Revising the Diamond Projections

Knowing the future and Revising the Diamond Projections

‘De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  the new diamond resource assessment because it will remove uncertainty  about what President Khama meant about Botswana reaming a ‘significant diamond producer’ until 2050 and will help private investors in Botswana make better informed decisions.’

In late 2008, in wake of the financial meltdown,  the worst since the Great Depression of the 1930’s,  Her Majesty Queen Elizabeth, paid a visit to the London School of Economics and posed the incredibly embarrassing question to the assembled economists  ‘how was it that none of you  could see this coming?’She asked. It was a question that could not easily be dismissed because, after all, this was the Queen and she was simply echoing the very question that was on everyone’s lips.  How did the economists get the future so wrong? The number crunchers from the LSE, one of the UK homes of that type of economists who believe they can help mere mortals see the future through their highly sophisticated equations and models looked at their shoes and within a few weeks were spinning all sorts of answers.

Had the Queen gone to Cambridge University she might have come across a few remaining economists who were still literate but not counted amongst the highly numerate charlatans that populate so many universities. Those who were trained by Lord Keynes, the most famous economist of the 20^th century, would certainly have answered what Keynes taught at Cambridge and what every businessman and woman  know-  ‘Mam’, they would almost certainly reply ‘the past is immutable and the future  is unknowable’ This is almost trite but it encapsulates the difficulty that we all face both as people and as businessmen. We make an investment and one it is made that decision cannot be readily changed and we make that investment believing but never really knowing what the future holds cannot be known it offers opportunities. And where we are wrong in our investments and the dice of posterity do not fall in our favour...there is always the bankruptcy court which is market’s way of dealing with fools and uninformed optimists.

In 2008 and 2009 the consensus amongst mainstream economists  was that what was happening to the world was just a financial crisis  stemming from US banks and global investors having mistakenly and with government incentives offered  mortgages to people who did not have the income enough to pay. This is what was called the ‘sub-prime mortgage crisis’. Banks all over the world bought bundles of these American mortgages, often not knowing the laws or even the nature of the asset they were buying, and hence an American financial disaster quickly morphed into a global one.

It was only later, starting in 2010 that some economists began to ask if the 2008 crisis was simply just  a banking crisis then why did it begin amongst the poor and lower income groups in America and why in 2008?  It was then people started to put various bits of the crisis together. The process of analysing what happened in 2008 is by no means complete and hundred of doctoral these are yet to be written. What is known is that there has been a massive shift in the distribution of income in the USA over the last thirty years in favour of the rich and away from those low income workers, ie those who were supposed to pay these sub-prime mortgages. Along with the massive rise in oil and food prices that occurred in 2006/7just  before the 2008 financial meltdown provided the conditions for the economic crisis. No-one saw it coming because no-one was looking at what had happened to the structure of the America economy and those charlatans whose models did not predict what happened were largely looking forward based on one or other variant of what had happened in the past. Driving down the highway looking in the rear vision mirror is never very clever.

Economists Make Mistakes … sometimes big ones!

Late last year I was asked by the Ministry of Minerals to make a presentation on the future of base metal prices. I just giggled. For years I had seen absolutely wrong projections from the IMF, the World Bank and Economist Group on the future of commodity prices. If the economists in any of these  agencies or firms could reasonably predict copper and nickel prices with any accuracy then they would be  very, very rich people and would not be sitting at their work stations  making predictions of the future for a few thousand dollars a month .

We have a similar case with oil prices which should be a lot easier to predict but oil prices have in the last few months slipped from over $110/barrel to under $50 in the last few days. Can anyone find an economist or so called ‘commodity specialist’ who was predicting that the price of oil would halve in 2014? To the best of my knowledge, not a one!  But unlike the far more complex situation with money markets this decline should have been fairly predictable. Between the massive increase in the supply of gas and other hydrocarbons as a result of ‘fracking’ in the US , the collapse of substitute hydro-carbon and fossil fuels eg coal and the weakening global economy there should have been warning bells. But this did not occur.

Is Economics useless?

If your idea of economics is based on believing scurrilous  number crunchers, ie those predicting the future then on the basis of past performance  a saguma will give you results that are probably no worse than most economic forecaster. The famous economist John Kenneth Galbraith once quipped that the only function of ‘economic forecasting was to make astrology look respectable’.  But if your vision of economics is a little humbler, that as a  discipline it exists to help people to understand  what forces shape the world we live in then it is far from useless.

Diamond projections

But there are errors in economics that stem from really bad data and information. Last year I undertook a study for the government about the future of the Botswana economy after diamonds ran out. That of course was based on the assumption that the diamonds would soon run out. I did not try to predict the future but to analyse why the country had not diversified and what would happen when, based on the governments’ own estimates the diamonds would run out by 2027. But those predictions on future diamond production were wrong and superseded in August 2014. All the analysis the government had done which showed that diamond revenue would seriously decline after 2027 were completely wrong. The new resource projections were made by the diamond industry and on  this basis HE President Khama could safely say in the state of the nation address  in 2014 that Botswana will remain a ‘significant  diamond producer’ until the end of the 2050. But President Khama did not elaborate on what  it meant in practice to be a ‘significant producer’- does that mean 5 Mcts o5 25 Mcts per annum as both numbers are significant.

Clearly the earlier diamond projections upon which Botswana’s 10^th National Development Plan were based were completely wrong and they were wrong not because De Beers suddenly discovered a massive new mine but because there is no financial interest in informing the diamond  market that there are far more diamonds in Botswana as it will only serve to depress world prices. But there are  bigger  development issues for Botswana. The new  resource assessment is almost certainly very good news for Botswana as it means there will be no imminent decline in diamond revenues after 2027. For the sake of Botswana I am happy to report that my earlier assessment was completely wrong. But equally the new resource assessment mean for an entire generation the heat is now off the policy makers and as a result no-one will ever think seriously about undertaking the sort of economic reform measures that are needed to drive economic diversification.

 But because the resource assessment is not public the good news about the future of the country is also not public and hence it is vital that the government release the future diamond production projections to 2050 because all private investment in Botswana ultimately rests on this number. De Beers and the Ministry of Minerals Energy and Water Resources should  release, in approximate figures,  this new diamond resource assessment because it will remove uncertainty  about what President Khama actually meant about ‘significant diamond producer’ and will help private investors make better informed decisions about investment. The future, as Keynes said, is unknowable but there is no reason to make the job of business more difficult by not publicising this most important of Botswana’s statistics.  

These are the views of the author and not necessarily those of any institution with which he may be affiliated.

 

 

 

 

 

  

 

 

 

Diamond Beneficiation in Decline in Namibia and South Africa and Stagnant in Botswana

Diamond Beneficiation in Decline in Namibia and South Africa and Stagnant in Botswana

The wages of diamond cutters in Botswana and India are not  dissimilar yet in India there are 800,000 cutters and in Botswana only 3,750. The difference between the two countries stems largely from the productivity of workers. De Beers in its 2014 Diamond Insight Report has said that the cost of cutting in 2013 ranged from $60-120/ct in Botswana while in India the range varies from $10-50 per carat. In other words in the smaller diamonds, Botswana is six times more expensive than India and for the larger more expensive stones, it is almost three times as expensive because of low productivity, low cost of ancillary services as well as the number of working days in the year - 232 in Botswana  as opposed to  over 280 days  in India.  That is the reason that Botswana is limited to commercially cutting stones of one carat rough and above.

The only bit of good news is that at the top end Botswana is becoming a slightly cheaper place to produce than was the case five years ago. But the other two smaller southern African diamond producing countries which are trying to beneficiate diamonds ie Namibia and South Africa are actually more expensive locations than Botswana and it is for that reason along with the supply of rough and what the industry considers draconian beneficiation requirements etc. are also very important issues here) that employment in South Africa has almost halved in the last five years in diamond cutting from 1,800 workers in 2008 to 1,000 in 2013. The situation in Namibia is almost as bad with employment falling from 1,500 in 2008 to 970 in 2013. In other words, with the exception of Botswana diamond beneficiation is going backwards in the main producing countries of Southern Africa. Indeed the costs of cutting in both Namibia ($60-140/ct) and South Africa (130-150/ct) are higher and tend to be rising faster than in  Botswana.  But the increase in beneficiation and the increase in employment is mandated under a 2006 agreement between De Beers and the Government of Botswana.   

If the world’s ‘diamantaire’ had their way no cutting or polishing would occur in Botswana and Southern Africa at all. The answer as to why cutting occurs in Africa is as De Beers politely puts it in its publication because of ‘government policy’. In other words if you are a De Beers sightholder and you want Botswana or Namibian or South African rough diamonds then you have to process some of them here. How much? So far the answer is not very much at all. In 2013 about  23 million carats of rough were produced in Botswana and if the Statistics Botswana figures are to be believed the total volume of polished exports was a mere 273,000 carats in 2013. Assuming it takes 2.5 carats of rough to produce 1 carat of polished diamonds Botswana is in effect exporting 3% of its rough produce. While the value of cut diamond exports has been rising from Botswana the volume of diamond production has been more or less stagnant over the last five years of the De Beers agreement,  

At first the results of the efforts of diamond beneficiation i.e. 3% of production looks very unimpressive until you consider that because of the low productivity in Botswana and the fact that 80% of diamonds coming out of the ground are very small (ie less than 0.2 carat) most diamonds have to be processed in low cost centres like Mumbai and Surat in India where there are 800,000 Indians working cutting diamonds. Jewellery and cut diamonds is India’s biggest manufacturing sector and it exists because the Indians have been able to produce cut diamonds cheaply and because they have access to Africa’s diamonds. The Indians emphasize the former and ,dangerously,  tend to take for granted the latter.

The employment numbers, costs and the general direction of beneficiation are not encouraging in Namibia and South Africa. In Botswana the results are better but require a real reassessment by all governments as to what is being done throughout Southern Africa. Both Zimbabwe and Angola also have serious aspirations to cut and polish diamonds as well. The failure of diamond beneficiation is a direct result of the failure of industrial policy to address the fundamental issues of productivity in these infant industries. In Botswana for example there is not even a diamond school to train cutters and polishers who have been trained by individual firms in the industry. But a school is the least of the issues. It is necessary to come to terms with workers and unions on the productivity issue or the potential benefits of diamond beneficiation will be lost to India permanently. Industrial policy in Africa has helped to create infant industries but has rarely if ever had sufficient focus on the boring, expensive and very ‘un-sexy’ issues of nurturing the infant industry to become globally competitive.

Often there is contradictory policies that serve to weaken beneficiation. On the one hand governments want beneficiation but in the case of Botswana they also want diamond trading independent of De Beers so the buyers from state owned Okavango Diamonds which currently sells some 13% of national production is exempted from the beneficiation obligations and its buyers can simply take their diamonds elsewhere for cutting. This figure is set to rise to 25% over time. Many diamantaire reason - why buy from De Beers and be forced to operate an inefficient factory in Botswana when you can buy from Okavango or Lucara and  just send your diamonds to India for cutting. The thinner the profit margins for cutting become the more the complaints mount from De Beers siteholders. But it is one thing to complain, quite another to give up a secure De Beers site which assures constant supply of diamonds for  profitable Asian factories.

The unfortunate response of some policy makers to the low productivity and stunted development of this infant industry, is as so frequently the case, to merely look for more value added activities such as jewellery making rather than doing the hard graft of addressing productivity issues in the cutting and polishing industry. This involves working with firms and workers to develop appropriate ways of addressing the productivity and cost issues which in turn involves money which governments are unwilling to provide. This is the hard tedious work of day to day industrial policy and there are no simple or pat answers to raising productivity and becoming internationally competitive but if successful it is an activity that could create employment for tens of thousands of African workers.   

But perhaps the most difficult and useful question is how do you deal with the unions and the workers? If you listen to some of the employers they simply wish the unions would go away and they be allowed to increase productivity and take all the increase in profits. Such an approach is unworkable and what is needed is a way of assuring that part of any increase in productivity goes to the workers Without such a productivity sharing arrangement and a partnership between unions and employers,  industrial policy will not work in the diamond cutting sector.  

From a short term perspective the best outcome would be exactly what the world’s diamantaire expect, that the infant African industries will go into terminal decline, as appears to be the case already in Namibia and South Africa, and India will resume its ‘rightful place’ as the natural home of diamond cutting and polishing of Africa’s diamonds. In Africa this outcome will be a political disaster and no thinking ‘diamantaire’, whether Asian or European should wish for as the complete failure of beneficiation as it may well prompt a knee jerk inward looking reaction from African governments when it comes to dealing with diamond trade.

These are the views of the author professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated

 

 

An OPEC for Diamonds- Could it Work?

Would a  ‘cartel-lite’ or ODEC for Diamonds work?

If HE. President Khama’s recent state of the Nation address is anywhere near correct then diamond production in Botswana  will continue at globally significant levels until at least 2050. Industry sources suggest that Botswana’s  production at the main mines at Jwaneng and Orapa could, in theory, continue at similar levels to 2050 but this ultimately will depend on prices and the costs of extraction. Given the P25 billion in expansion announced by Debswana in Maun last week costs of extraction will no doubt rise and while production may continue government revenues will surely decline. The obvious question is whether there is another  way that Botswana  and other diamond producing countries can delay the decline in revenue for at least a few more years.

According to the estimates presented by Dr Rob Davies from Zimbabwe recently at a conference in Gaborone there is scope for Botswana to  have a ‘gentleman’s agreement’ with other major producers to  slow production of diamonds even further than has been the case. With diamonds as with other commodities the only problem in the market is to find a gentleman with whom you can have an agreement.  In what is probably the first public estimates ever it was found that a 1% increase in price of rough diamonds will only result in 0.45% decrease in demand for rough diamonds. Unsurprisingly Dr Davies results show  that the demand for rough diamonds is what economists call ‘inelastic’ i.e. unresponsive to changes in price. This means that it is possible to decrease production and simultaneously increase profits and government revenue at the same time because consumers will not stop buying. Dr Davies estimated that 25% decrease in production would eventually yield a 16% increase in government revenues. 

Planned Contractions?

It was certainly noticed by the International Monetary Fund in its recent 2014 publication on Botswana that the country has become the ‘swing producer’ in the world diamond market. This is in fact not strictly the case and while Botswana is by far the biggest producer in the De Beers  zone i.e Botswana, Namibia and South Africa all have undergone significant decreases in production since the onset of the ‘Great Recession’ which began in 2008. Production was dramatically cut in Botswana from the 30 Mct plus production which was common before the economic crisis to much more modest levels. In 2013 production was a around 23 Mcts.  But the decrease in supply from the De Beers zone in the post 2009 period  was helped by the natural decline of diamond production in what were previously substantial low value producers like Australia. If the Kimberly statistics are to be  believed, then total world production of diamonds peaked in 2005, long before the Great Recession,  at 176 Mcts and declined sharply during the recession but has never recovered and in 2013 was 130 Mcts or 26% off its peak.

 But while Botswana diamond production went through the most dramatic of decreases simply because it was the largest producer in the De Beers zone, similar patterns of decreasing diamond production were experienced in Namibia and South Africa. Irrespective of the origins, the decline in production has given rise to  some of the most spectacular price results seen in the rough diamond market for decades. Unit export values for Botswana rough diamond rose at the their fastest rate since the early 1980’s. This is hardly what economists expect; for prices to rise so rapidly during one of the most sluggish periods of  economic growth on record since the great depression of the 1930’s. And yet what it took was simply an act of restricting supply to the market in a perfectly legal way ie. by keeping the stones in the ground. Part of the observed  decline was of course the natural decline of diamond mines in Australia and other locations.

No gentlemen in diamonds?

So could Botswana and other diamond producers limit production even further to increase returns? In theory yes, but in practice there are several caveats. Any further restrictions in supply and increases in price could result in even greater incentives to substitute, often illegally, synthetic diamonds  which are undetectable to the naked eye for mined diamonds in the production of jewellery. The anecdotal evidence, despite what some of the diamond bourses want to believe, is that  nefarious penetration of the diamond market for smaller stones is already occurring in a significant way. While global production  is declining China is now the world’s biggest producer by far with no mines to speak of and production estimated at around 6-10 billion carats of industrial diamonds.

But even if the world’s’ diamantaires’ are  even willing or let alone able to  keep the synthetics out of the value chain for a few more years there is the perennial problem of any such ‘cartel-lite’ approach to managing the diamond markets – it is the problem of chisellers.  A cartel whether light or heavy version like the Central Selling Organisation  run by so successfully by De Beers until fifteen years ago,  is that they are like a marriage between pathological philanderers where the parties want the marriage but everyone wants to cheat ie, chisel on their partners. The nice thing about diamonds is  that  mined diamonds are really scarce in nature and hence the possibility that when the countries inside the tent decide to cut production that someone outside will just ramp up production as happens so frequently with OPEC and the oil industry is just not there… well at least not entirely.

No Russian Free Riders – Bring Putin in!

Russia has for the last several years just kept its production relatively static but being the world’s largest producer by volume  any agreement to keep the diamonds in the ground would need an agreement between Russia and Botswana at very least. Together Russia and Botswana make up some 45% of global production.  Including Namibia and South Africa would strengthen the arrangement and bring the share of world trade to 55% but the real interlopers at the margin are Zimbabwe ( 10mcts in 2013), Angola(9mcts) and DRC (15mcts) which are significant diamond producers but whose borders are so porous and whose regulatory systems are so opaque that any agreement by them to restrict production would be of  no commercial value.  Even though promises  about output levels from these countries are virtually meaningless it is important that if such an arrangement is ever developed that they are inside rather than ‘outside the tent’.  The only other producers of any significance Australia (11mcts in 2013)and  Canada (10.5 mcts) would almost certainly never agree to join such an arrangement.

A production restricting ‘cartel lite’ arrangement that focused on the larger diamonds( i.e. grater than melee size ,0.2 carat)  and an agreement to limit these rarer but more valuable  stones may have a significant effect on the market and would not require De Beers, Alrosa or BHP-Billiton to involve themselves in what would, at a commercial level be an illegal cartel, that would result in legal action by both the EU and the USA. However, this  would be a perfectly legal inter-governmental agreement to conserve a scarce resource which all countries have the right under WTO rules to do.

An obvious threat to such an arrangement would be new entrants e.g. like the diamond discoveries in Zimbabwe over the last decade. However, new and significant  discoveries of diamonds are actually quite rare and the industry consensus is that  few major additions to mined supply are expected.

The final possible threat to this sort of arrangement might come from the ‘grand diamantaire’ -those billionaires further down the value chain, who because of their own diamond stocks and massive financial resources were able to destabilize the De Beers control of the diamond market in the early 1990’s. At the time De Beers cartel was able to discipline anyone who got in their way. But those days are now long gone and these ‘grand diamantaires’  must constitute the most serious threat to any supply restricting arrangement. Could they successfully destabilize the market as Lev Leviev did in the 1990’s. If Botswana and Russia were to co-operate then the answer is probably not. 

For Botswana this arrangement might work to delay the inevitable decline in diamond revenues for five or ten years. But in diamond deals  there are no sure thing and whether an ‘ODEC’ (Organization of Diamond Exporting Countries) that keeps diamonds in the ground succeeds would have a good deal of luck involved- as is always the case with diamonds.

These are the views of the author and not necessarily those of any institution with which he may be affiliated.    

After Diamonds we shall live like Swazis

After Diamonds we shall live like Swazis

 

Virtually every economist who has studied the country, and there are literally hundreds of them,  have told Botswana what every Batswana already knows in their heart of hearts- that despite the marketing slogan, diamonds are not forever. One day the great diamond mines at Jwaneng and Orapa will close and then what will happen  if   the country has not diversified its exports then Botswana will simply become much poorer. But how much poorer and when? If the modelling estimates that have been presented this week by BIDPA and BOCCIM are anywhere near correct then our GDP/ capita will fall by approximately 48%. What does that mean in practical terms? At present Botswana’s GDP/capita which is the standard measure used by economists to measure a country’s income is US$ 7,300 in 2013 according to the World Bank. If our GDP/capita fell by roughly 48% as the modelling estimates suggest we will live slightly better than Swazis who have a GDP per capita of US3,100.

Now what the modellers have done is work out what would happen to Botswana if the diamonds come to an end. Fortunately this is not going to happen any time soon and most of the estimates indicate that we will be producing some diamonds until 2050. While diamond production will continue the estimates are that a very large portion of the diamond revenue will start to fall off after 2027. Much of the effect of the decline in diamond revenue will be felt by Botswana after that date and it is no doubt part of the reason why the government has moved to establish a fund for future generations which will see savings rise substantially in the coming years.

Beware of good news merchants

The first response to telling people bad news (‘you are going to die a long and painful death’, for example) is usually complete denial. The second response, as I know at my peril,  is to ‘shoot the messenger’ if you can.  One senior economist in government has told me that ‘your work is completely wrong - how can GDP per capita fall by 48% if the diamond mining sector  is only responsible for some 20% of Botswana’s GDP’.   The answer is pretty straight forward – diamonds might only add 20% to Botswana’s GDP but they are over 80% of foreign exchange earnings. Without foreign exchange earnings the whole economy will grind to a halt. Another banking economist  told me that these results fly in the face of all the future projections from the international financial institutions which say that Botswana will have future economic growth rates of 4%- no need for a fund for future generations or these projections that simply panic people. All this assumes that the diamonds will be there… but they are not forever. 

In a similar vein one ‘futurologist’ in Pretoria said  at a workshop I attended last week said that African countries do not have to worry about mining i.e. digging holes in the ground because Africa’s economies are now so diversified. Many of these good news merchants peddle the same economics as I got here in Gaborone but the brutal reality in Botswana and throughout Africa is that digging holes in the ground is what underpins everything else in the African economies and those who forget it imperil future generations who have to live with the consequences of those who do not understand the economic consequences of resource depletion.

Export of Die!

Is there really anything that Botswana can do to avert the dramatic declines in income and living standards that are expected with the end of diamonds. The answer is and has always been that the only way to avert this disaster is through diversification- not diversification of GDP but of exports. In other words when the diamonds run out Botswana  needs other sectors that will generate the foreign exchange the country will need to buy imports. But ever since the opening of the Jwaneng diamond mine in 1982 the government has maintained a policy of export diversification but without success. Botswana’s exports are now even  more dependent upon diamonds now than they were 30 years ago in no small part because of the cutting and polishing  of diamonds is now our largest manufacturing sector with exports of P6.8 billion of cut and polished diamonds in 2013.

The reasons that  Botswana has failed to diversify its export sector for over 30 years is complex but it is certainly not for want of trying or throwing money at the problem. The Financial Assistance Policy for over 20 years spent tens of millions of pula subsidizing industry to employ people to almost no sustainable effect until it was finally ended in 2000. The unavoidable fact is that industry in Botswana has been uncompetitive on  a cost basis and there has never  been sufficient attention ever paid to the very un-sexy job of increasing the nation’s productivity and lowering production costs.

BIDPA ( a national think tank) and BOCCIM ( the chamber of Commerce)commissioned an international cost study of where our costs are highest by doing a comparison between 9 SADC countries and three Asian countries (India, China and Malaysia). What was found was that the area with the biggest cost disadvantage was in the area of highly skilled labour costs, professionals and management. What was found, much to our surprise, was that at the bottom end of the wage scale amongst those who earn the lowest wages,  that their wages were on average lower than that of India. The conclusion of the work was that if Botswana does not lower salaries at the top end, lower company tax rates for exporters to meet our competitors in Africa and dramatically improve transport costs then export oriented firms will never locate there.

Botswana can compete!

There is absolutely no reason that within the context of the 60 million people in the SACU market  that Botswana cannot be a strong and competitive exporter. There is no doubt that South Africa, in both the case of Botswana’s attempts to export electricity and automobiles, has  acted to undermine our efforts but the nation can diversify  if there is  the recognition and the will to face a  national emergency that is at hand and recognize that living standards will drop massively unless we become competitive. This is an incredibly unpopular message and everything I know about people in denial, tells me that it will be forgotten almost immediately the report is received. But if policy makers do not like this message that those on high salaries need to sacrifice current high living standards to be internationally competitive so that the next generation will be able prosper then just wait 20 years or so and market forces will give you no choice once the diamonds run out … because the diamonds, like our current living standards, are not forever.

These are the Professor Roman Grynberg and not necessarily any institution with which he may be affiliated

Botswana's Diamond Fund for Future Generations

Botswana’s New Fund for Future Generations

 

The amount that will be saved, based on 2014 revenues, would be about P5.3 billion ($600 million) in that year and will increase as diamond prices rise in pula terms and so by 2026 when government revenues from diamond mining fall off, could create a fund for future generations worth approximately P120 billion($13 billion), depending of the drawdown rules and rates of return.

 They say that the best kept secrets are always in plain sight, especially for those who look, but never read. So it is with the most profound change in Botswana’s economic policy for decades. No-one really noticed or perhaps didn’t even read what was contained in the Ministry of Finance and Development Planning Budget Strategy document. The strategy paper in paragraph 26 said that Botswana would set aside and save 40% of mining revenue for future generations. The IMF has long been pushing for precisely this sort of policy for a number of years to help Botswana prepare for a post –diamond future and every once in a while the IMF, despite its best efforts, actually gets it right. Of course if you actually believe that the next generation of Batswana , which will have no diamonds,  will be richer than the present generation then the IMF advice is clearly wrong.  But this is certainly one of those cases where the Fund has got it right. This is an unprecedented change in policy and for those who are deeply concerned with Botswana’s post-diamond future it is welcome news and the only reasonable reaction is that it is a good move that should have been implemented 32 years ago when the Jwaneng diamond mine opened and changed the face of Botswana.

 

The amount that will be saved, based on 2014 revenues, would be about P5.3 billion in that year and will increase as diamond prices rise in pula terms and so by 2026 when government revenues from diamond mining fall off, could create a fund for future generations worth approximately P120 billion, depending of the drawdown rules and rates of return. It is understood that it is the government’s intention is to create an annuity type fund where the country will receive a sustainable dividend that will continue long after the diamonds are gone. This type of sovereign wealth fund is used by the best managed resource rich countries like Norway and Qatar that fully realize that their oil and gas revenues will be gone one day and given the amount of money in question know that they need to give the next generation a chance to benefit. What both Qatar and Norway understood was that if they simply took all the huge amount of revenues derived from their natural resources they would end with unsustainable and irrational investments in infrastructure as has happened in so many countries that have abundant natural resources and have not restrained expenditure.

 

While this is a positive move for all those who realize that a poorer Botswana will be left to our children if this is not done. There should be no illusion, one does not save without sacrifice and so there are many questions that need to be answered by the Ministry of Finance and Development Planning to assure that this is a genuine sovereign wealth fund, beyond the immediate financial and political needs of the country. The key issue is who will run it and under what rules and how can those rules be changed. I have seen a similar fund destroyed in Papua New Guinea by an unscrupulous Prime Minister who simply changed the rules so as to be able to use any amount of money he wanted. Some countries have gone so far as to imbed the fund for future generations into their constitution so that only a constitutional amendment can allow a government to use and abuse these funds.

A need to protect the people

Clearly a fund so large needs to be managed by a combination of outside independent financial advisers and relevant officials from the MFDP and the Bank of Botswana. Botswana already has what some people commonly call a sovereign wealth fund – the Pula Fund, administered by the Bank of Botswana. During the ‘Great Recession’ which began in 2008 the Pula Fund was heavily drawn down so as to prop up the nation’s foreign exchange reserves. The Pula Fund, despite the hype, is not a real sovereign wealth fund, it is merely a buffer fund and while this is useful it does not assure that wealth is transferred from this generation to the next.. If there is to be a fund for future generations then it cannot be used in such a manner or it will simply collapse in the face of the economic crisis that will occur in the period after 2026 when the diamond revenues go into serious decline.

The billions that will go into the fund for future generations will need independent people to manage it and it must report to government and parliament directly so as to assure that some future government, that may be less committed to sustainability and sound economic management, does not raid the fund as is regrettably common practice.

The Old Botswana Model has stopped working

What seems entirely missing is the economic question of why the government is doing this at this point in the country’s economic history, rather than 32 years ago when it would have had much bigger and better results. The economic model of Botswana since the opening of Jwaneng has always been that the government takes that diamond revenue and invests it in infrastructure and human resources. This creates an educated workforce operating in a modern environment which can adapt to what the world throws at Botswana. The need for a pool of inter-generational financial resources was never seen as necessary as long as the export sector diversified and there were prospects for Batswana other than diamonds. This unfortunately has never eventuated.

The simple fact is that much of the new government investments in infrastructure and education at the beginning of Jwaneng made a good deal of sense, but as time went on the high yielding investments in infrastructure and in education disappeared and there was progressively more investment in projects that were, to be polite, economically marginal, e.g., giant but empty police stations, standards bodies with buildings big enough to house 2 jumbo jets and investments in yet more tertiary education institutions, while thousands of graduates remain effectively unemployed as interns.

  Who will pay for this fund?

The really important question is where will the billions come from to pay for this fund? It is fine to save money, but someone always pays. Here the government is about as up-front as any government can be with what is a very sensitive matter. The resources will come out of a more prudent policy on wages and salaries in the public service. The Budget Strategy Paper states ‘The implementation of the fiscal rule will therefore require measures to control and manage expenditure, especially the wage bill’. Those who welcome this unambiguously also emphasize that some of the government’s less effective pet projects will have to be abandoned and there will now have to be a more rigorous project evaluation. This is extraordinarily naive. One can only hope that this view is right; but in the real world it is usually the deeply political projects and not necessarily the sensible economic ones that will go ahead- fund or no fund.

The ones who will pay will in part be the public servants who will receive lower real wages and the public at large. The hardest thing to imagine is that you are overpaid. But the simple reality of Botswana’s economy is that salaries of professionals and managers are simply too high for any export-oriented diversification to occur. It is one of the big ticket items explaining why Botswana has never diversified. This is an incredibly unpopular thing to say, but its unpopularity does not make it less true. Professional salaries are the part of what makes Botswana so highly uncompetitive. Restraint in the public sector salaries is an important part of addressing this issue, but also breaking up the ‘professional cartels’ that limit competition from foreign lawyers, accountants, architects and engineers needs to occur in order for Botswana to become internationally competitive. It is not the wages at the bottom of the pay scale, which are lower than that of India, that are the problem, but the salaries at the top are amongst the highest in the region.

The only negative thing that can be said of the government’s proposed fund for future generations is that it is simply too little and too late in Botswana’s economic history to stave off a major fiscal crisis that will surely come around 2026, when diamond revenues fall drastically. But it will provide the country with some cover.

 

BIDPA, together with BOCCIM, will be organizing a conference on November 13th which will be discussing Botswana’s future after diamonds. Some of these issues will be addressed at this meeting.

 These are the views of the author and not necessarily those of any institution with which he may be affiliated.