Russell Shor Photo by Melissa Jacobs/GIA

The close of 2007 brought to the fore what is certain to be this year's hot-button diamond issue: African beneficiation.

De Beers' Diamond Trading Company (DTC) has prepared its client list for the next 30-month term, which will begin in April. As expected, about 25 percent of the clients were dropped, reportedly in favor of African cutting operations, prompting a vigorous protest from India's Gem & Jewellery Export Promotion Council. And, just before year's end, the New York-based Diamond Manufacturers and Importers Association of America issued a plea to DTC Sales Director Varda Shine to keep sightholders and diamond manufacturing in New York, citing its established infrastructure and the key role it plays in maintaining price and market stability by directly serving the world's largest diamond consumer market.

At the same time, a number of Israeli and Indian firms (along with a few American and Antwerp manufacturers) have actively pursued African beneficiation efforts by opening diamond cutting operations in Botswana, Namibia and South Africa.

Framing the beneficiation debate are two opposing sides: the first noting that such programs are not viable because they can only work if the cutting factories cherry-pick the best quality rough; the second maintaining that such policies are necessary to correct historic exploitation of Africa's resources.

Addressing the first point, a prominent Russian diamond executive who represents one of the world's largest producers, joined the debate by saying out loud what most in the diamond industry are thinking: beneficiation won't work because none of these operations can compete economically with mechanized shops in India.

ALROSA President Sergey Vybornov addressed the Antwerp Diamond Conference last October saying his company's diamond polishing operations have not been economical, despite the advantage of receiving supplies directly from the parent company. ALROSA no longer subsidizes these operations, he said, adding, "Only the market can decide [who can process diamonds profitably]."

He acknowledged the African nations' desire to create jobs and increase revenues, but warned that these goals can't be achieved if the manufacturing operations can't compete in the real world.

"Such manufacturing operations need investments of hundreds of millions of dollars, but the large diamond financing banks do not have a presence in Africa," he said. "If plants are established, the focus should be on economic viability [in competing with established diamond cutting centers] while rejecting populist measures."

Vybornov's argument certainly makes perfect economic sense. No venture can be sustained in the long run if it can't be justified on financial grounds. And, regarding his own country's experience, his address did not tell the half of it – that some of the cutting ventures opened in Russia a decade ago were little more than dummy operations applying a few facets before sending the goods out of the country to be processed much more cheaply elsewhere.

Politics and business logic do not always exist on the same plane, however.

Addressing the second side of the beneficiation debate, consider the words of conference keynote speaker Joseph Stiglitz, a 2001 Nobel Prize winner in economics, who said that changes taking place in the diamond business held out the possibility of improving the lives of millions of Africans living in diamond producing nations.

"Although it has been claimed that Africa has not succeeded because it has not taken part in the globalization process, this is the wrong interpretation," he told the conference. "Africa has been affected by globalization, but in ways that were unfair to it."

Stiglitz added that these included unfair trade practices that "led to the paradox of countries that enjoyed the possession of mineral resources being worse off than countries that did not have them."

So which side is correct? One can find many instances – Botswana in particular – where Stiglitz is wrong, or at least far too general in his portrayal of Africa. But right or wrong, his view prevails among African governments and within many think tanks.

It is not enough to point out that such ventures, for various reasons, have not worked well in Russia or Canada. Each national government sees its own country as unique, and many developing nation governments view economic arguments as justification to continue the perceived exploitation of their resources.

The diamond industry has to show each government that it is trying to make beneficiation work, while government officials must show their people they are making use of these precious resources to improve citizens' lives.

So, the bottom line is that beneficiation must be allowed to prove its viability or demonstrate its impossibility to governments and those who claim that it is a workable redress of past exploitation. Then the way will be clear for the industry and governments to properly balance their respective interests with policies that benefit everyone.

Russell Shor, GIA's senior industry analyst, has covered the gem and jewelry industry for 25 years. He reports on marketing trends and business issues, calling on experts from around the globe for their opinions and perspectives.