to exports, GDP and government revenue. This section provides some background on the role of diamond mining in the Botswana economy.

# **2.1 Diamonds and Botswana’s Economy**

Botswana is the world’s leading diamond producer in terms of output value. In recent years, Botswana has constantly exported over 30 million carats of rough diamonds per year, generating export proceeds of about US$3 billion. Diamond mining in Botswana takes place through Debswana Diamond Company, a 50-50 joint partnership of De Beers and the Government of Botswana. All the rough diamonds produced in Botswana are exported to the Diamond Trading Company (DTC)—the sales and distribution arm of the De Beers Group—which sorts, values and sells approximately 40 percent of the world’s rough diamonds by value.<sup>2</sup> Diamonds are characteristically different from other commodities. The most distinctive feature of diamonds is the relative price stability (Figure 1).<sup>3</sup> Much of this price stability rests on the fact that a single company, De Beers, which controls a significant proportion of the world’s rough diamond mines and distribution channels for gem-quality diamonds (Keretschmer, 1998), has used its dominant position to control the international diamond market. Nevrtheless, with the emergence of new diamond producers such as Russia, Canada and Australia, which chose to distribute diamonds outside De Beers’ channel, the company’s dominant market position has weakened considerably in recent years (Nocera, 2008). Since the turn of the century, the diamond industry is said to have gone through a major transformation from a supply-controlled industry to that which is driven by demand.

**Figure 1.  Commodity Price Indices (1990 = 100) /1**

<!-- Start of picture text --> 400<br>350 Aluminum ($/t) Coal, Australia ($/mt)<br>Copper ($/mt) Crude oil avg spot ($/b)<br>Gold ($/toz) Iron ore (¢/dmtu)<br>300 Lead (¢/kg) Nickel ($/mt)<br>Steel cr coilsheet ($/mt) Zinc (¢/kg)<br>BW rough diamond ($/ct)<br>250<br>200<br>150<br>100<br>50<br>0<br><!-- End of picture text --> Sources: World Bank GEP database and Botswana Department of Mines Annual Reports (various issues). 1/ The price of rough diamonds is derived from the value of Botswana’s diamond exports and volume of production (carats recovered).

The relative absence of the extreme boom and bust cycles in diamond mining has helped Botswana achieve rapid economic growth. Although Botswana has experienced some output fluctuations over time (1981/82 and early 1990s), the magnitudes of these fluctuations were far smaller compared with those experienced by other resource-dependent countries. Since production in Jwaneng mine reached its full capacity in 1985, Botswana’s real output has more than tripled, with per capita income growing more than five times in Pula terms.<sup>4</sup> The mining sector—where the bulk of value added is generated by diamonds— has been the largest contributor to the country’s GDP, although recently its share has fallen to about 35-40

> 2 Since 2009 a small proportion of diamonds produced in Botswana is supplied domestically to facilitate the growth of local diamond cutting and polishing industries.

> 3 Other differences include the absence of universal world price per carat/gram of diamonds since prices vary widely depending on the stone’s carat, color, clarity and cut; and the low liquidity of diamonds as an investment vehicle due to the lack of liquidity and homogeneity as well as difficulties in grading and hence in pricing the stones.

> 4 It was not only diamond mining but the sense of corporate social responsibility that De Beers brought to Botswana.  It has built roads, hospitals and schools in Botswana, worked to help the country deal with HIV/AIDS and been involved in and paid for many other things that have helped make Botswana an African success story (Nocera, 2008).

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