69091 Diamond Production and Processing: What Armenia can Learn from an Intra-Regional Exchange on the Diamond Trade Karén Grigorian focused policy approach toward diamond manufacturing and jewelry production. Key Messages1 This is certainly the case with Armenia. Although the  There is a growing gap worldwide between the country does not mine diamonds, it has a long-established rising demand and stagnating supply of diamonds, tradition in diamond manufacturing and was a key diamond producing new opportunities for diamond processor in the Soviet era. The industry initially processing countries such as Armenia. experienced a steep decline following the 1991 breakup of  Building productive capacity through skills the Soviet Union, but soon recovered, owing partly to development and technological progress is of central networks among the Armenian diaspora. However, despite importance to achieving sustainable growth in the sector’s nearly 30-percent share of exports reached by diamond manufacturing countries. the early 2000s, the industry lost its strong competitive edge after 2004, due to increases in the costs of the factors  Secondary diamond industries are successful of production and the emergence of more competitive where economic and social conditions are optimal centers such as India and China. and supportive.  To develop or maintain a competitive edge in Today, with an estimated workforce of 3000–4000 experts, diamond cutting and jewelry manufacture, all Armenia is still a competitive center for cut diamonds, countries in the diamond trade need to constantly which, along with the traditionally strong jewelry-making develop their human resources. sector, contributes to job creation. Expatriate Armenians, who have established successful operations abroad and  For diamond producers as well as processors especially within the Commonwealth of Independent States like Armenia, investment in product branding is (CIS), are also increasingly looking at Armenia as a hub for worthwhile, and the promotion of a diamond-based sharing knowledge and showcasing diamond products. tourism may also be viable. Considering its obvious competitive advantages, including access to global networks and to Russian rough and Armenia’s Potential as a Diamond Processing Country internationally-mined diamonds imported for processing The effects of the diamond industry on several developing through established FDI, Armenia seems ready to rebuild a economies in Europe and Central Asia (ECA) and parts of sustainable diamond cutting industry with new policy Africa cannot be underestimated. In those countries, efforts options and targeted regulatory interventions. In particular, to boost entrepreneurship, skills, and foreign direct it is interested in gaining knowledge about global investment (FDI) could benefit from a proactive and developments and the regulatory and tax incentives needed to boost and attract new investments. The export processing zone (EPZ) experience is of particular interest to Armenia as an instrument for creating new downstream (or 1 This brief was prepared with the benefit of papers and processing) opportunities—that is, processing diamonds presentations from the Intra-Regional South-South Knowledge and selling the resultant jewelry products—and helping it Exchange Forum in Gaborone, Botswana, November 21–23, become a Eurasian hub of the diamond trade. 2011 ECA Knowledge Brief An Intra-Regional Conference on Diamond Processing are mined. For instance, data from Botswana, a diamond producer, indicated little cost advantage for its diamond In light of its interest in refurbishing and improving its cutting and polishing activities (see figure 2). diamond processing industry, Armenia was among those countries that requested the South-South Diamond Figure 2. Revenue and Collections Processing Exchange that took place in Gaborone, Botswana, on November 21–23, 2011. This South-South initiative for developing countries emphasized the World Bank’s role as a ―knowledge broker,‖ facilitating these kinds of platforms for policy makers and private sector players to learn from international best practices and the successful experiences of other countries. Over 75 global experts and participants from Armenia, Botswana, Lesotho, Liberia, Mauritius, and Namibia, representing diamond producers and processors, took part in the three-day conference, which included site visits, peer to peer meetings, and other networking opportunities. Conference activities were designed to strengthen knowledge about five crucial areas of the diamond trade: policy and legislation, Source: Diamond Processing Exchange, November 21–23, 2011, fiscal regime and fees, human resource development, the Gaborone, Botswana role of government and communities, and the marketing of the final products. Producing countries must therefore establish a competitive edge in the global diamond processing market if they are to Key Conference Outcomes achieve long-term success, a concern illustrated in figure 3. Those countries hoping to create a viable diamond The first outcome from the exchange was that important manufacturing industry are squeezed by competition industry players remain optimistic. This is reflected in the pressure from two directions: one from low-cost economies projection for demand, which predicts a growing gap such as India and China, another from high-skills between rising demand and a stagnant supply (figure 1). economies such as the United States, Belgium, Israel, and This is good news for producing countries—though it also Canada. For any latecomer, the challenge is plain: either be indicates their vulnerability to external shocks should this cheaper (and work harder) than the former, or be more projection be wrong. knowledge and skill intensive (and work ―smarter‖) than the latter. Figure 1. The Emerging Supply-Demand Gap Figure 3. Diamond Cutting Segmentation by Cutting Center Source: Anglo American; De Beers exploration data; as estimated from company reports. Source: Diamond Processing Exchange, November 21–23, 2011, Note: Indicative supply demand view is based on current assumptions Gaborone, Botswana The second outcome was that producing countries that are This led to the third conclusion of the conference. trying to develop downstream activities should move from Countries, producers or manufacturers, that intend to leverage to competitiveness if their beneficiation (raw promote their diamond processing industry must achieve material treatment) strategy is to bear any productive fruit. major progress on two fronts: reducing costs and building Without the right mix of factors, little economic rationale capacity, and they should use their ―leverages‖ to promote was seen for diamonds to be cut and polished where they capacity building. ECA Knowledge Brief Lessons from Armenia (a processor) and Mauritius (a product. Producing countries typically want to capitalize on producer) suggest that costs can be reduced in at least three cutting and polishing opportunities to expand employment, areas: business environment, infrastructure, and labor cost. take advantage of any ―value-added‖ activities, and become For the first two, the bottlenecks are mostly known, as are more competitive. Among these diamond producers, the the general solutions; the challenge lies in their supply of rough diamonds is obviously not an issue, and implementation. The key difficulty, however, is how to turn governments are able to negotiate with producers to ensure a low living standard for workers into low labor costs, and adequate supply for local cutting and polishing. For further investigation should be done on why this continues nonproducing countries like Armenia, however, rough to be so difficult for certain countries, Armenia among supply is clearly more of an issue. them. Clearly, the mix of low skills and labor productivity with high wage rates will not help a developing country Developing a Secondary Diamond Industry remain competitive in the diamond processing industry. Secondary diamond industries—in producers or Training a new workforce by encouraging skills transfers processors—tend to be successful where economic and was also recommended. This usually involves a closer social conditions are optimal and supportive, rather than collaboration between policy regulators and private sector simply because the government wills it. Each country stakeholders. Though skills transfer in diamond cutting is involved in the diamond trade has its own strengths and typically assumed by companies, governments also need to weaknesses, in most cases reflected in: have a dedicated approach to capacity building. Botswana  Mineral endowment (i.e., diamond producers) is an example of a country that has managed its natural  Workforce productivity (the degree of skills resource endowment well and harnessed the private sector development, knowledge transfer to local workers, in a creative way to derive a wide range of benefits, commitment to the trade) including new skills, thus providing a strong foundation for  Regulatory and fiscal policies (enabling legislation, future development. In fact, to maintain their competitive fair taxation) edge in jewelry and diamond cutting, countries need to constantly develop their human resources. Attempts to develop a cutting and polishing industry in countries where skilled labor is not available or business Armenia represents a powerful lesson regarding skills. The costs are high have either failed or required significant country became a key player in the global diamond subsidies. Even in a diamond producing country, imposing industry not because it produces any rough diamond or a cutting and polishing industry where economic conditions because it has a big market for diamonds, but because of its are not supportive will ultimately reduce the long-term capacity to process diamonds. As was noted at the benefit of the resource to that jurisdiction by conference, Armenia is indeed exporting skills, but it still  Distorting the free market forces must import diamonds in order to do so.  Reducing the revenue to producers, leading to a reduction in the market value of the goods, which in The fourth conclusion is that diamond producing—and turn will reduce the production royalty return to the even diamond manufacturing—countries should invest government more in branding, and explore the potential of combining diamonds with tourism. As was emphasized, the power of a For any country, Armenia included, to be competitive in brand should not be underestimated, something that is the cutting and polishing industry, it needs adequate access particularly challenging for latecomers, although in a to rough diamonds and affordable labor and operating growing market and time of technological progress, they do costs, including capable, skilled, and experienced workers. have opportunities to establish their own brands (or partner Also needed are responsible laws that promote policies and with existing ones) and catch up and even overtake the regulations reflecting the will of the country’s citizens and current market leaders. There also may be significant supporting its economic development, leading to positive advantages to combining diamonds with tourism, for social and economic benefits. instance, promoting travel to certain countries as centers of diamond mining or diamond cutting. Lessons Learned Beneficiating Diamonds This South-South initiative provided a useful exchange for conceptualizing reforms or new policy frameworks aimed Armenia, like some other countries, has effectively used its at maximizing the economic benefits of the diamond revenues from diamond production to improve the social industry. and economic conditions of its people. Armenia has been successful in capitalizing on the secondary diamond industry (cutting and polishing), primarily through access to skilled labor and the successful procurement of rough ECA Knowledge Brief Armenia and the Value of EPZs cultivated and nurtured. Companies such as Harry Winston invest a significant amount of money each year on branding Whether Armenia should establish an EPZ for its diamond and advertising (about 10 percent of turnover). Still, as the industry remains open to question. The experiences of case of Mauritius demonstrates, branded diamonds may Mauritius and Namibia in creating EPZs in the diamond hold more potential for local tourist markets rather than for and jewelry sectors illustrate the limitations. Both countries outside the country. Diamond tourists in that country are were successful in jump-starting downstream diamond- reportedly not so interested in the origin of the diamonds as related activities, yet both experienced serious constraints the reputation of the Mauritian Cut as a top brand. Tourists caused by the high cost of production and the insecure should also come to a country with the knowledge that supply chain (in Mauritius) and poor investment climate (in diamonds are available and, in the case of Mauritius, duty Namibia). free, so that they are cheaper than they would be in the buyer’s home country. In Armenia, where diamond cutting In the case of Armenia, which faces similar weaknesses, could be branded with a nod to its 70-year history, there is diamond EPZs may offset deficiencies in the business room for exploring this potential and emulating the climate and compensate for the high cost of production. Mauritian model by promoting the ―Armenian Cut‖ and the The Armenian government has recently begun country’s jewelry tradition in the fast developing tourism experimenting with such EPZs, and although it has market. received a request from the international Armenian Jewelers Association to establish an EPZ for the jewelry Synthetics: Competitor or Partner? and diamond sectors, a number of issues need to be considered. These include: type of EPZ, impact on overall One topic that loomed over the conference was the issue of industry, policy reform needs, harmonization with other synthetic diamonds, i.e., those produced in a laboratory. EPZs, and assessment of target countries and companies. Some participants called synthetics ―the elephant in the room,‖ while others thought they would never carry the Supply, Brand Loyalty, and Diamond Tourism aura of natural diamonds. Another view was that there was room for synthetics in the market for lower-priced ―bling,‖ At the conference, industry representatives stressed the but that this would depend upon the cost of production. In importance of the security of supply and the difficulty fact, synthetics have to be cut and polished in the same way involved in retooling and retraining when suddenly dealing as natural diamonds and already have a strong market with different quantities and qualities of diamonds. In order niche. Armenia, like Mauritius and other countries with an to avoid these snags, Armenia, which us still competitive in existing trained workforce, could likely benefit from specific market niches, could benefit from strengthening its cutting synthetics, in much the same way as cutting natural existing arrangements (mainly involving importing rough diamonds. from Russia) and developing stronger links with key production centers through their networks of Armenians This issue, like EPZs and other proposals, should be living abroad. This is what has accounted for the success of considered within the overall strategy of improving the De Beers’ Diamond Trading Company model over the Armenia’s diamond industry. Clearly, there is considerable years—the secure supply ensured that customers returned. potential in bolstering the traditional diamond The case of the Rosy Blue company in South Africa manufacturing sector in Armenia as a means of promoting illustrates the other side of the problem. Rosy Blue closed its economic development. its operations in South Africa after training 240 people and About the Author then failing to secure a steady supply of rough diamonds. Karén Grigorian is a Country Sector Coordinator for the South The issue of the retail price of diamonds is also relevant, Caucasus in the Private and Financial Sector Development Unit since cutters and polishers have to hold on to stock for of the Europe and Central Asia Region of the World Bank. some months, leaving them vulnerable to price changes. Although the long-term outlook of the diamond jewelry business currently looks very positive, with rising demand and limited supply, fluctuations in both demand and supply always threaten to undermine stability. Moreover, the very nature of the diamond jewelry industry means that it very much depends on such less tangible factors as emotions and loyalties, which have to be ―ECA Knowledge Brief‖ is a regular series of notes highlighting recent analyses, good practices, and lessons learned from the development work program of the World Bank’s Europe and Central Asia Region http://www.worldbank.org/eca