South Africa is making sweeping changes to its Diamond Law. Among other things, the new system, endorsed by President Thabo Mbeki, will require international diamond companies, including De Beers, to bring in local black partners and dedicate a certain percentage of rough diamonds to local diamond manufacturers.

And the country's former Minister of Minerals and Energy, who was recently named Deputy President, Phumzile Mlambo-Ngcuka, isn't shy about trying to influence neighboring diamond-producing nations to move in a similar direction.

Years before, though less publicly, the government of Canada's Northwest Territories began to pursue a similar course with local cutting operations. A government minister there reportedly (as noted in the Journal of Energy & Mineral Resources Law) told BHP Billiton that it would face "taxes that would choke a mule" if it did not follow ostensibly voluntary guidelines to supply local diamond cutting operations with rough from its Ekati mine.

Although controversial, there's a political and social logic at work. A significant percentage of South Africa's population is still awaiting economic benefits from majority rule and unemployment is a chronic problem in Canada's Northwest Territories - the subarctic climate attracts little or no industry beyond mineral exploration and extraction.

When large mining companies remove precious resources from such economically depressed regions, it makes sense that local governments would seek to retain some of the benefits for their own populations. If economics naturally followed such basic logic, there would be little controversy surrounding these policies. But in today's complex world, things are much more difficult.

How, for example, can local diamond polishing operations compete with highly efficient, mechanized ones in India, Israel, China and other diamond centers?  Many of them have automated rough evaluation, sawing, bruting and brillianteering by use of computer-guided lasers and polishing machines. India and China also have large, low-wage labor forces.

How can new ventures in diamond mining countries stay in business? The answer: It's extremely difficult to do so on their own. Their labor costs are much higher, they lack the technology (much of which is proprietary) of advanced diamond manufacturing facilities, and they have few connections to the downstream market.

Without the ability to be better, faster and cheaper, there are three ways such ventures can stay in business: They can "cream off" the better qualities of rough that are easiest to cut, thereby siphoning profits from traditional diamond centers; they can lose money on their operations while surviving on government subsidies; or they can attempt to brand their products and charge a premium price.

South Africa is clearly pushing the first approach. When questioned about Indian competition at a diamond conference in Antwerp last fall, Minister Mlambo-Ngcuka bluntly stated that "companies [wanting rough] will have to deal with us." The DTC, after years of resisting pressure to supply diamond manufacturers in mining countries, has reversed course and is pressuring its clients to process rough diamonds in South Africa. South African firms comprise more than one-fifth of DTC sightholders, many of these supporting Black Empowerment Enterprises.

Will this work? Some analysts point to Canada, where local manufacturing operations are in difficulty. Canada's approach has been to begin with subsidies, then ease cutting operations into branding, in close cooperation with the diamond mining and manufacturing entities. However, success has been elusive, and one of the largest operations, Sirius Diamonds, went into receivership nearly a year ago, costing the Government of the Northwest Territories Can$8.8 million (US$7 million) in defaulted loan guarantees, though it eventually recovered nearly half that amount.

When De Beers Managing Director Gary Ralfe addressed the Africa summit of the World Economic Forum in June, he pointed out that India's manufacturers can polish a "great number" of rough diamonds produced in southern Africa that would otherwise be classed as industrials. If these goods were redirected to countries with higher labor costs, then the price of the rough would have to be lowered to keep them economic.

"Who would lose out on that?" he asked. "It would inevitably be the exchequers of [South Africa, Namibia], and particularly Botswana, which is so dependent upon diamond revenue coming from its mines."

The ultimate truth, however, is that governments owe their allegiance - and, in a democracy, their existence - to their own populations, not the diamond industry. Therefore, it's certain that diamond-producing nations will demand ever-greater control over their diamond resources. It's also certain that everyone, from diamond cutters to retailers, will have to adapt to the changes these demands will bring.

Russell Shor, senior industry analyst for GIA, has been covering the gem and jewelry industry for 23 years. His column reports on marketing trends and business issues. He calls on experts from around the globe for their opinions and perspective.