The Unintended Congo “Catastrophe” of Dodd-Frank Conflict Mineral Provision

A number of months ago I wrote a blog entry on the requirement in the Dodd-Frank bill, put in by then-Senator (and now Kansas governor) Sam Brownback, prohibiting the purchase of “conflict minerals”—those that might be used to finance warfare in Africa, particularly the Congo. I noted the very simple economic point that this would create a surplus that would drive prices down, mostly harm local miners, but benefit buyers/countries without U.S.-level scruples about these purchases.

I shouldn’t brag—any Econ I student could have seen this point; but it is nice, albeit depressing, to see this prediction come true. From David Aronson in the New York Times:

Unfortunately, the Dodd-Frank law has had unintended and devastating consequences, as I saw firsthand on a trip to eastern Congo this summer. The law has brought about a de facto embargo on the minerals mined in the region, including tin, tungsten and the tantalum that is essential for making cellphones.

The smelting companies that used to buy from eastern Congo have stopped. No one wants to be tarred with financing African warlords — especially the glamorous high-tech firms like Apple and Intel that are often the ultimate buyers of these minerals. It’s easier to sidestep Congo than to sort out the complexities of Congolese politics — especially when minerals are readily available from other, safer countries.

For locals, however, the law has been a catastrophe. In South Kivu Province, I heard from scores of artisanal miners and small-scale purchasers, who used to make a few dollars a day digging ore out of mountainsides with hand tools. Paltry as it may seem, this income was a lifeline for people in a region that was devastated by 32 years of misrule under the kleptocracy of Mobutu Sese Seko (when the country was known as Zaire) and that is now just beginning to emerge from over a decade of brutal war and internal strife.

Brownback’s provision has harmed precisely those it was designed to protect, the small-scale miners in the Congo, but it has certainly lowered the price faced by Chinese processors for these inputs. Law of unintended, but what should have been perfectly expected, consequences.

 

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COMMENTS: 17


  1. johnadamsxii says:

    A transparent free market beats any politician or economist.

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 4
  2. Eric M. Jones. says:

    “prohibiting the purchase of ‘conflict minerals’ ”…

    And this differs from buying oil from dictators, princes and kings…how?

    Well-loved. Like or Dislike: Thumb up 17 Thumb down 2
  3. Rahul says:

    I don’t know why the Brownback provision was put in. But if it cuts the flow of cash to the Government and the rebels, it will be a very significant positive, one that will outweigh the losses to these individual miners. Who probably are, under their own laws, stealing from common property.

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    • Frank Johnson says:

      They will simply acquire arms and help from other nations who seek to have an influence there while the poor people will suffer. It is like boycotting a country because they allow some children to work and pay low wages to others—any money is better than NO money.

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  4. Jason says:

    There is no WIN when the Government get’s involved in economics. Just another point proven here by this write-up. Thanks for showing!

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  5. Brookie_d says:

    Does Barney Frank EVER do anything that doesn’t have devastating consequences? Hello??? He is at least partially responsible for the entire collapse of the housing market.

    Hot debate. What do you think? Thumb up 17 Thumb down 14
  6. Dan says:

    It is quite obvious that this would be the short term consequence of such a decision. The question, however, is whether the “embargo” and thus reduced financing available for the Warlords (the intended consequence of this provision) will weaken them to the point that a legitimate government can be established in the long run. If this happens (or can happen) than the provision will have worked perfectly. Seems to me to be a simple case of delayed gratification.

    Well-loved. Like or Dislike: Thumb up 11 Thumb down 6
  7. Georgette says:

    Interesting.

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  8. Frank Johnson says:

    Why should anyone be surprised? It continues on. Congress and this administration have no clue on the real effects of laws and regulations passed. They are clueless. Until we get individuals who outlook is longer than 1 inch or 3 seconds we will continue to get these types of legislation and laws which harm the very people they propose to protect–look at the comsumer protection aspects of the law, look at the regulations which prohibit oil and gas drilling, the encreased milage standards which will guarentee much less safe autos, the epa rules which decrease our ability to compete on the world market while we subsidize countries which are our enemies. All I can say is WAKE UP FOOLS!!!

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  9. EP says:

    Is that kind of like making abortion safe, legal, and rare. And free?

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  10. beuler says:

    Your basis for the article is wrong. The consequences of the law were entirely intentional. Those people who survived as mine slaves can now go back to farming like their grandfathers did. It is not going to happen overnight, and most mine slaves never learned to farm in the first place, but the change, even if painful, is good.

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  11. David Aronson says:

    Hi, this is David Aronson, the author of the NYT op-ed. I’ve enjoyed Freakonomics for a long time, so it’s a pleasure to be mentioned by you.
    Neither I nor any of the Congo civil society organizations I spoke to have your pedigree in economics, but it was obvious to most of us that Dodd-Frank would a) cause reputable Western firms to seek their minerals elsewhere, b) thus hurting the poor miners most, and c) result in non-Western firms moving in to fill the gap.
    My fear is that the Western firms aren’t coming back. Right now, to my knowledge, there’s only one Chinese counter buying minerals from eastern Congo, so it’s obviously buying at a major discount–and only purchasing a fraction of the available supply. Which to me raises these questions: if more Chinese firms come in to eastern Congo, will they coordinate their purchasing behavior so as to continue to behave in monopsonistic fashion? Or will they start to compete with each other? Will demand from non-Chinese, non-Western sources eventually drive prices (and demand) back up to near-previous levels? How many firms need to start buying again–and at what volume–for the artisinal miners to again be making (close to) what they used to make?
    Any guidance from you or your audience would be welcome.

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  12. Jonathon says:

    encouraging a corrupt system because its easier in the short term for those people does them no favors, this will force them to either overcome or die trying, either is better than the life they have now.

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    • Becky says:

      @Jonathan ” . . . die trying . . . better than the life they have . . .” Who are you to decide who lives or dies by what YOU think is it’s worth! The small miners were not the corrupt ones, but you don’t care if they starve to death because of government regulation.

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  13. Chuck Blakeman says:

    Agreed. My Congolese partner and I run a Congo based export company (agriculture and minerals). We work only with artisanal chiefs/tribes for the minerals, specifically to give them a highly visible, well-documented path to market to avoid the militia and any connection with conflict. I’m supposed to be shipping coltan for one of the chiefs while I’m here and had to tell them we can’t find a buyer – the smelters have vanished – they all say it’s not worth the risk that Apple, etc. won’t buy from them. They can get all this somewhere else. Meanwhile innocent people in the Congo are now starving.

    The politicians and activists, who despise Kinshasa on every other occasion, are now all quoting the support of the Congo government for this bill, as well as the NGOs. None of them wants to quote the chiefs or the approximately 1 million people on the ground in the Congo being devastated by this.

    So the government, the NGOs and the activists all sit in their warm houses supporting each other, and the chiefs and people plead for this bill to be stopped, without anyone to quote them. Who would you believe, the bureaucracies and activists, or the people who actually have to live with this disastrous bill?

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  14. Richard Young says:

    I have continued to follow the Conflict Minerals discussion with interest given that during the 1970s I was perhaps one of the largest tantalum buyers in the world. As at lready stated elsewhere, tantalum is unique because it is inert when used in those products introduced into the human body, is highly chemical resistant, and has valuable electrical properties. It ist principally found in five areas of the world: Australia, Canada, Brazil, Southeast Asia, and West Africa (although there is said to be a new discovery in NE Saudi Arabia.

    Despite the major using firms having already stopped purchasing end items made with metals sourced in the DRC, the cost of compliance is daunting when one considers the number of layers in the tantalum supply chain once by-products are figured into the traceability requirement. Bear in mind that when the regulation speaks of “scrap” the intent is that this is post-consumer material, hence my use of the word “by-product.” Tin slag is one source of tantalum, but while some might consider slag to be scrap, the fact that it is processed to extract trace tantalum makes it by-product under the regulation. An electronics maker with a quantity of defective tantalum capacitors will often sell these to refiners who will extract the tantalum and sell it, perhaps to a manufacturer of master alloys who will sell those to steel mills. If a steel mill produces galvanized strip that is sold to an automobile body panel stamper who in turn sells fenders to one of the auto companies, we wind up with a complex supply chain that the regulators expect to have understood and documented.

    The law of unintended consequences is alive and well, and clearly in play with the Dodd-Frank Conflict Minerals provisions. It might make good press, but as can be seen from some of the other posts, the economic implications are not as the supporters envisioned or intended.

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