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Red CountryThe year is 2017. My name is Lachlan. As I go back in time, I try to make sense of the last couple of decades standing behind me. I'm heading fast to my 50th. Quite a date. Half a century! I know, I know, it's all spurious. Two hands, five fingers each; ten in total. Twentyfour hours in a day, 365 days in a year. It would all be different if we had descended from the birds, or evolved in a different planet. But, still. Half a century is a dry gulp for a man to swallow. As dry as the air I breathed day in, day out for the last fifteen years at the Pilbara mines in the outback of Western Australia. At this day and age, being a half-centenarian is hardly a big deal. Fifty is the new forty, right? I've got mates my age running ultramarathons and doing 10km ocean swims over in Bondi, that look like they're straight out of cereal commercial. But not me. I was spent. I don't look a day older than sixty. The outback sun and hot air are killers. They suck you dry. There are more lines on my f ace than on a high-definition screen.But, I'm not here to talk about me. My story is not special. It's one of many. We all went through this together. We all jumped onto the same bandwagon together, and eventually got run over and crushed by it together. In this sense, this as much my story as any of my fellow mates. We all had our losses. For me it was wife and family. But, I was lucky. For others, that was it; no more. The one thing we all lost together was our country. And we didn't even have it for long; a little over a couple hundred years. We dug it inside out, till eventually it was all gone. How did we end up here? It wasn't long ago that I had traded my city slick journo job at the Herald to drive trucks the size of mammoths in the mines.It wasn't exactly a dream job, but, mate, the money that was to be made digging dirt at that time was unbelievable! And with property prices going through the roof in Australia, a man had to do what a man had to do to feed and shelter his family. That's what I did as a political journo anyway, so not much change there. Just different kind of dirt. Especially that I covered state politics in NSW. The desert dirt was probably cleaner. Or so I thought.Mining doesn't require a whole lot of brain matter, you know? Unless of course you're working as a geologist or a mining engineer. But driving a tractor up and down the pit ain't no rocket science. Especially now that much of it is all mechanised and automated. So the mind is left to its own devices, and starts to wonder. Where was it all going? What was to be of it? Yes, yes, to the steel mills of China. I knew that. Everyone did. But, what that meant for us was as bewildering as it was mysterious. I knew of the Great Recession or the GFC, i.e. the Global Financial Crisis, as we called it in Australia, but only because I read the news. For all I could tell, times were good. Let me rephrase that. Times were great! Business was booming. The Chinese appetite for iron ore was insatiable. No wonder! One point three trillion people is an unfathomable number to build apartment units for. At least for us in Australia. A couple of decades ago, we were less than twenty million. China was sixtyfive times bigger. That's a lot of highrises to be built! At the beginning of the decade, for a moment people despaired of the sheer number of empty apartments in China. Sixty-eight million empty units, imagine that! It's comical now, in hindsight, to talk of a property bubble in China. Now we know what that was all about, but not then. Except, of course, the Chinese Politburo. They knew exactly what they were up to. Hard to see all that when you have your head buried in the sand, though. Literally! But, as the days ticked past, I would still notice the fluctuations of my daily routine. It wasn't hard. It was all very real; very tangible. Ten tons, eleven tons, nine tons... It's amazing how the human brain is wired to read patterns into things. Stock prices, temperatures, lines on one's hand, tea leaves... iron ore volumes. They had to mean something. Those changes had to have a reason. Otherwise, our days were wasted. Our lives were hollow. We were just soldier ants, ferreting dirt back and forth. No, there had to be a reason. And I kept looking for it. After all, I still had it in me. The bright and bold investigative journalist that I once was hadn't left me entirely.Life at the mines wasn't the most stimulating. Now we have plenty of technology to keep ourselves busy and connected, but when I started at the mines, some fifteen years ago, it was pretty early days for internet in Australia. We still didn't have NBN, the National Broadband Network. It was all satellite. That was junk! Pretty impossible to hold a skype video call. So I only got to see the mrss. and the kids once every 23 weeks. And only for a weekend! That's not to say that those weekends were heaven either. There was so much anticipation, so much anxiety built up by the separation over those weeks, that when we did all meet, after a brief moment of silent and giddy reunion, all hell would break loose. Everyone would be dissatisfied about something. Kids fighting amongst themselves; they wifey giving me the word about something I wasn't doing quite right, and about how unappreciated she felt. What an emotional rollercoaster it was! But, somehow, we persevered. We reasoned it was temporary, and necessary to save enough to afford our own place in this land. See, house prices started taking off in Australia, and especially in Sydney, around 2000, when we got married. By the time we were no longer playing the rent around dinkies game in Balmain, with two kids to feed and shelter, the Sydney property market had gone through the roof. House affordability was on everyone's mouth.[1] Adding insult to in jury, journo salaries got smashed by offshore outsourcing and online media.[2] That was it, no choice. When I was eventually made redundant, the penny dropped that we career I had chosen and studied for at Sydney Uni was over. So we bitt he bullet and packed our bags to Perth. Not that moving to Perth was such an ominous destiny. It’s not Sydney, that’s for sure. But it’s sunnier, and less congested. At that time, property in Perth was a lot more affordable than in Sydney, and would be much closer Kim’s family in Nanjing. All stars were aligned west, and west we went.Of course, by the time we had saved enough for a deposit, five years later in 2008, the Perth market had skyrocketed. If we thought house prices in Sydney were high, Perth prices were on zylox! It was beyond silly. Obviously it was a reflection of the mining rush China had sponsored all around the world. The simple metric for all that was BHP’s stock price. At that time, the Anglo-Australian miner was the world’s largest. BHP’s stock had been trading around $11 at the NYSE for over a decade spite of booms and busts at the NASDAQ. Then , in , on a fatidic 3 Jul 2003, it turned a corner. On that day, the whole resources industry turned a corner, and never looked back. BHP went from $11.51 at the close of trading on 3 Jul 2003 to $95 on 16 May 2008. That’s over 700% growth in less than 5 years! An average fifty-four percent a year!! No wonder everything was going up in prices around Perth. Everyone and their dog was heading to the mi nes, and there were no shortage of jobs. Washing dishes paid $2,000 a week! Even McDonald’s was struggling to compete, and started offering to cover FIFO (fly in, fly out) costs.[3] I had to move up in the food chain, if we were ever to get ahead of the market. And so I started training on the tractors.That was about when it hit us. Like an abrupt gust, all of a sudden everything was gone. Jobs, people, plans and dreams. China had pulled the plug. It had put a hold on all purchases. We weren’t quite sure what was happening at the time. Had the Pagoda collapsed? The news were all speculation and no fact, even from within China. Those were some very long three months. The uncertainty was torture; Chinese torture. My family was no longer used to cohabiting with me. Worst of all, I wasn’t used to sharing my space with them either. It was one thing coming over for short visits weekends, but not being able to fully kick back and relax day after day drove me insane. Kim was now used to running the house her way, and my presence there while not being under her motherly authority sure made her uncomfortable. She never mentioned it, but I could tell. Instead, it all came through as snappy remarks which had out of nowehere adopted the colouring of a cultural clash. Perhaps, it wasn’t ‘out of nowhere’. Perhaps she had it bottled inside her all along, and now it was finally coming through. And it was coming in tsunami waves. See, when Kim moved to Australia for her studies, she was that shy, young Chinese girl with broken English, fragile limbs and soft skin. This was at a time that China was nowhere near the superpower that it became. China was a joke! It was the last man standing in a post Perestroika era among other luminaries su ch as North Korea, Vietnam, Laos and Cuba. The Chinese had none of the air of importance they breathe now. They came to Australia in droves to study here, and learn English, so they could eventually get a job and a life in the US. Many of them stayed. Kim was one of them. In fact, Kim is not even her real name. They all adopted English sounding names before coming over. Afraid of inconveniencing us with their 1,600 unique syllables, they dumbed themselves down to fit in. But, no more. Try mispronouncing someone’s Mandarin name now!When ships loaded with iron ore started hitting the Chinese ports, it all came into perspective. The ships read ‘Vale Brasil’. They were all valemaxes, the largest bulk carriers ever built. Vale, Brazil’s mining giant, had these custom built by the South Korean Daewoo.[4] These are classed as VLOCs, Very Large Ore Carriers, and carry over 400,000 DWT (deadweight tons), 10% more than its predecessor, the Norwegian Berge Stahl.[5] The sole purpose of having the vessels was to reduce shipping costs to China to an even level with Australia.[6] And it did it in style, being the the first ship to ever receive NorShipping's Clean Ship Award.[7]China had Australia cornered. Through those crazy noughty years, Australia caught a serious case of ‘Dutch disease’ (the term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959). Australia had completely deindustrialised itself. Some believed it had become a service economy, but the truth is that those services, mainly financial services, were simply ancillary to the mining sector, and the labour it employed. It became a monoculture at the service of a single client. China became our biggest trade partner in 2007, surpassing Japan and the US, our traditional partners until then. As the US economy dug itself into an ever deeper hole, and Japan’s already fragile economy became increasingly more vulnerable after a series of unfortunate natural disasters that hit its shores and landmass, we were left to our own devices up against the largest nation ever in human history. It was a biblical case of David and Goliath, but I’m afraid we weren't quite as lucky or skilled as Hebrew David.We should have seen it coming. I mean, c’mon! If you knew you were the sole buyer of a given supplier, while having the option of buying from other competing buyers, wouldn’t you want to squeeze him? You’d be daft not to. It’s not a matter of cruelty; it’s sovereignty. Sovereignty and national security. Not much more than a decade ago, China still had about two hundred million people living on less than $1.25 a day. That was six hundred million better than what it was in the early 1980s, but still… two hundred million! That’s still a lot of people!! It was two thirds of the American population, and ten times ours!! When you have this many people in need, no use of market power is abusive. This has a name in economic theory: it’s called monopsony. To think we ever presumed to teach commerce to the Chinese! To the Chinese?! To the Chinese!! You gotta be kidding me! The Chinese have the longest unbroken mercantile tradition of all nations. They invent ed paper money for God’s sake! And fourteen hundred years ago!! Marco Polo was so mesmerised by what he saw there five hundred years later, that he wrote a whole chapter just on paper money. And it still took Europe another five hundred years to adopt it! It took a full millennium for Europe to catch up to the Chinese on this most simple of all financial technologies!! And we were going to teach them commerce??Some people actually called it. Ernst & Young released a report in March 2011 saying that China h ad ‘shifted its strategic direction’ towards Brazil, Ecuador and other parts of Africa, and away from Australia, for its iron ore requirements. Truth be told, the Chinese had gripes accumulating with us, especially at BHP, for a long time. "BHP Billiton ha s had a frosty relationship with China over the past 2½ years. Some Beijing officials and executives blamed BHP's lobbying for helping to scuttle the 2009 Rio Tinto and Chinalco joint venture deal, which would have been China's most ambitious mining venture.[8] At that time, the Chinese are started to show their hand: "CHINA'S giant stateowned companies are becoming frustrated with delays in commissioning projects in Australia amid "unrealistic expectations of how quickly you can get th ings done", says BHP Billiton chief executive Marius Kloppers".[9] And the Chinese Politburo had more than one reason to want to take down BHP: "BHP offered to swap China info with USWikileaks".[10] Earlier, the whole acquisition, rather dispute was about the merger of Rio by BHP: "China has started an anti-monopoly review on a proposed iron ore joint venture between mining giants BHP Billiton and Rio Tinto amid growing tensions over pricing."[11]Then, for those watching closely, the weather changed when Dilma Rousseff, Brazil’s then president, spent a week in China, and it wasn’t for the yum cha. Dilma and Hu Jintao are all lovey dovey, and China doesn't need to offer much more than buying a fe w airplanes to get Brazil on board: "Presidents Hu Jintao of China and Dilma Rousseff of Brazil signed a joint statement Tuesday urging deeper cooperation between the emerging powers. The countries also announced a series of commercial agreements, notably the sale of aircraft from Empresa Brasileira de Aeronautica SA, or Embraer, to Chinese companies."[12]But China’s ultimate goal wasn’t iron ore, as it later became evident. That was just a pillar of our house of cards. The crown jewel we re the REEs, the rare earth elements. Rare earths are used in high-tech equipment. A lot of it is in Greenland, but much of it is also in Australia.Up until then, China produced 95% of it, but that’s just because their processing has environmental implications,leading producers to hunt for regulatory arbitrage[13] in less regulated or more easily corruptible jurisdictions. Lynas, the only Australian rare earth miner has been given approval from the Foreign Inves tment Regulatory Board (FIRB) to receive Japanese funding.[14] This is a proxy battle between China and Japan that remounts to WWII.[15] The FIRB is a key element in our story, as it is the part of the Australian government that works as a gateway for foreign investment in Australia. It has repeatedly curbed China from taking over the country.[16] There is even a wikileaks story on this.[17]Rare earth cerium is actually the 25th most abundant element in the Earth's crust, having 68 parts per million (about as common as copper). Only the highly unstable and radioactive promethium "rare earth" is quite scarce. REEs are often found together. The longest lived isotope of promethium has a half life of 17.7 years, so the element only exists in nature in negligible amounts (approximately 572 g in the entire Earth's crust). Promethium is one of the two elements that do not have stable (non radioactive) isotopes and are followed by (i.e. with stable elements, i.e. higher atomic number). Due to lanthanide contraction, yttrium, which is trivalent, is of similar ionic size to dysprosium and its lanthanide neighbours. Due to the relatively gradual decrease in ionic size with increasing atomic number, the rare earth elements have always been difficult to separate. Even with eons of geological time, geochemical separation of the lanthanides has only rarely progressed much farther than a broad separation between light versus heavy lanthanides, otherwise known as the cerium and yttrium earths. Yttria was discovered in 1794 and ceria in 1803. As originally found, each comprised the entire mixture of the associated earths. Rare earth minerals, as found, usually are dominated by one group or the other, depending upon which size range best fits the structural lattice. Thus, among the anhydrous rare earth phosphates, it is the tetragonal mineral xenotime that incorporates yttrium earths, whereas the monoclinic monazite phase incorporates cerium earths preferentially. The smaller size of the yttrium group allows it a greater solid solubility in the rock forming minerals that comprise the Earth's mantle, and thus yttrium earths show less enrichment in the Earth's crust relative to chondritic abundance, than do cerium earths. This has economic consequences: large ore bodies of the cerium earths are known around the world, and are being exploited. Corresponding ore bodies for yttrium tend to be rarer, smaller, and less concentrated. Most of the current supply of yttrium originates in the "ion adsorption clay" ores of Southern China. Some versions provide concentrates containing about 65% yttrium oxide, with the heavy lanthanides being present in ratios reflecting the Oddo Harkins rule: even abundances of about 5% each, and odd-numbered heavy lanthanides at numbered lanthanides at abundances of about 1% each. Similar compositions are found in xenotime or gadolinite.China ’s strategy to lay its hands on Australia’s REE deposits was Sun Tsu at its best. By cutting off Australia’s life support, China demolished its currency, and made all Australian assets cheap as chinky chips. Why Australia? Y es, it had the REE, but Brazil also had stuff China wanted. Brazil was and still is the largest exporter of soybeans and beef on the planet. It has its own problems with social inequality and weakness of institutions. But, Guido Mantega, the Brazilian phil osopher turned Finance Minister of then called the game early on. He is the one who coined the term ‘currency war’.[18] At the time, he wasn’t referring as much to China as he was to the US and Europe, who were devaluing their currencies at an ever increasing rate to both depreciate their debts and protect their industries. Brazil, having been a victim of extractivism by Portugal throughout its colonial past, and later of industrial imperialism first by Britain, and later by the US, sure as hell wasn’t going to let itself be raped again. Yes, China was also its largest customer, but it made sure it didn’t put all the eggs in the same century basket.We didn’t. Come to think of it, we were always a bit naïve, a bit sheltered. You can only be ‘the lucky country’ for so long. Sooner or later the world was going to catch up with you. For a while distance protected us. It isolated us, but it also protected us. Transport and information technologies changed all that. Coming and communicating with Australia became increasingly easy. This was a great sea changer for us, for the better, as many of us still had long lasting ties to the UK. But, in with the good, also came the bad. Telecommunication technology not only meant that we could chat with our families longer and more often, but it also meant that the Australian currency and assets became more easily tradeable. Trade automation completely eliminated any sand that To bin had left in the gearbox. This meant that the AUD could be at par with the USD at noon, and the country’s financial sector suddenly insolvent by the end of the lunch hour. And that’s exactly what happened.Footnotes[1] http://www.theage.com.au/business/property/australia-faces-housing-affordability-time-bomb-developer-20100317-qdii.html (http://www.theage.com.au/business/property/australia-faces-housing-affordability-time-bomb-developer-20100317-qdii.html) [2] http://www.smh.com.au/business/fairfax-confirms-outsourcing-plans-with-82-jobs-to-go-20110512-1ejwh.html (http://www.smh.com.au/business/fairfax-confirms-outsourcing-plans-with-82-jobs-to-go-20110512-1ejwh.html[3] http://jobcontax.wordpress.com/2011/05/30/maccas-imports-workers-to-fill-gap-caused-by-mines/ (http://jobcontax.wordpress.com/2011/05/30/maccas-imports-workers-to-fill-gap-caused-by-mines/)[4] The Vale Brasil : The Longest Ore Carrier in the World[5] http://antipodeanmariner.blogspot.com/2011/03/vale-brasil-400000-dwt-very-large-ore.html (http://antipodeanmariner.blogspot.com/2011/03/vale-brasil-400000-dwt-very-large-ore.html[6] http://uk.reuters.com/article/2010/09/28/china-ironore-ships-idUKTOE68R03C20100928 (http://uk.reuters.com/article/2010/09/28/china-ironore-ships-idUKTOE68R03C20100928[7] Non-Existent Domain[8] http://www.theage.com.au/business/bhps-china-story-continues-20110427-1dwuc.html (http://www.theage.com.au/business/bhps-china-story-continues-20110427-1dwuc.html[9] http://www.theaustralian.com.au/business/chinas-ceos-want-action-on-mining-projects-bhp/story-e6frg8zx-1226045876688 (http://www.theaustralian.com.au/business/chinas-ceos-want-action-on-mining-projects-bhp/story-e6frg8zx-1226045876688[10] http://www.reuters.com/article/2011/02/15/wikileaks-bhpbilliton-idUSL3E7DE27I20110215 (http://www.reuters.com/article/2011/02/15/wikileaks-bhpbilliton-idUSL3E7DE27I20110215[11] http://www.abc.net.au/news/stories/2010/04/16/2875461.htm (http://www.abc.net.au/news/stories/2010/04/16/2875461.htm[12] http://online.wsj.com/article/SB10001424052748704336504576258823758492268.html (http://online.wsj.com/article/SB10001424052748704336504576258823758492268.html[13] http://www.smh.com.au/environment/climate-change/rare-earth-gold-rush-extracts-a-price-20110527-1f835.html (http://www.smh.com.au/environment/climate-change/rare-earth-gold-rush-extracts-a-price-20110527-1f835.html[14] Finance News Network[15] http://en.wikipedia.org/wiki/Nanking_Massacre (http://en.wikipedia.org/wiki/Nanking_Massacre[16] http://www.theaustralian.com.au/business/opinion/china-faces-mining-investment-curbs/story-e6frg9lx-1111116736126 (http://www.theaustralian.com.au/business/opinion/china-faces-mining-investment-curbs/story-e6frg9lx-1111116736126[17] Business Spectator[18] The definitive dictionary of economic, financial and business terms

What is the relationship between total savings balance of China and the foreign exchange reserves of China?Thank s for A2A, Jack. Answer is a bit long, but it requires understanding the connection between trade and national savings and investment.In layman terms, saving is the difference between income and expenditure. In more economic parlance, it requires you to add the change in net equity of households having accounted for the investment if any in pension funds, and in financial assets such as stocks and bonds, or non-financial assets such as gold, or property but it tends to exclude capital gains or losses. Net saving is thus equal to saving less depreciation and final consumption expenditure and is measured as a percentage of gross domestic product.A country’s national savings is the total of its domestic savings by household and companies (private savings) as well as the government (public savings). If a country is running a trade deficit, it means money from abroad is entering the country and is considered part of the supply of financial capital. The demand for financial capital (money) represents groups that are borrowing the money. Businesses need to borrow to finance their investments in factories, materials, and personnel. When the federal government runs a budget deficit, it is also borrowing money from investors by selling Treasury bonds. So both business investment and the federal government can demand (or borrow) the supply of savings.There are two main sources for the supply of financial capital in the economy: saving by individuals and firms, called S, and the inflow of financial capital from foreign investors, which is equal to the trade deficit (M – X), or imports minus exports. There are also two main sources of demand for financial capital in the economy: private sector investment, I, and government borrowing, where the government needs to borrow when government spending, G, is higher than the taxes collected, T. This national savings and investment identity can be expressed in algebraic terms:Supply of financial capital = Demand for financial capitalS + (M –X) = I + (G – T)Again, in this equation, S is private savings, T is taxes, G is government spending, M is imports, X is exports, and I is investment. This relationship is true as a matter of definition because, for the macro economy, the quantity supplied of financial capital must be equal to the quantity demanded. In the equation above, it shows that the government is a borrower and is running a budget deficit since it is spending more than the taxes that it collects. On the other hand if the government is running a budget surplus and there is a trade surplus in exports minus imports then the equation looks like this:S + (X - M) + (T - G) = IIf a national economy runs a trade surplus, the trade sector will involve an outflow of financial capital to other countries. A trade surplus means that the domestic financial capital is in surplus within a country and can be invested in other countries.A nation’s balance of trade is determined by that nation’s own levels of domestic saving and domestic investment. To understand this point, rearrange the identity to put the balance of trade all by itself on one side of the equation. Consider first the situation with a trade deficit, and then the situation with a trade surplus.In the case of a trade deficit, the national saving and investment identity can be rewritten as:Trade deficit = Domestic Investment - Private domestic saving - Government or (Public savings)(M –X) = I – S – (T – G)In this case, domestic investment is higher than domestic saving, including both private and government saving. The only way that domestic investment can exceed domestic saving is if capital is flowing into a country from abroad. After all, that extra financial capital for investment has to come from someplace.Consider a trade surplus.Trade surplus = Private domestic saving + Public saving – Domestic investment.(X – M) = S + (T – G) – IIn this case, domestic savings ( both private and public) is higher than domestic investment. That extra financial capital will be invested abroad. Assuming you are from China, since China has been running trade surpluses and has high domestic savings, that extra financial capital is invested abroad in US treasuries bonds and in gold as well as in OBOR and also in other forms in National Investment Statutory vehicles such as China Investment Corporation. This connection of domestic saving and investment to the trade balance explains why economists view the balance of trade as a fundamentally macroeconomic phenomenon.In the second scenario, assume that the level of domestic savings rises, while the level of domestic investment and public savings remain unchanged. In this case, the trade deficit would decline. As domestic savings rises, there would be less need for foreign financial capital to meet investment needs. For this reason, a policy proposal often made for reducing the U.S. trade deficit is to increase private saving—although exactly how to increase the overall rate of saving has proven controversial. The US savings rate is probably too low, which is why the trade deficit persists.Trade imbalances can be affected by whether an economy is in a recession or on the upswing. A recession tends to make a trade deficit smaller, or a trade surplus larger, while a period of strong economic growth tends to make a trade deficit larger, or a trade surplus smaller. During recessions, as the economy slows, it purchases fewer goods and fewer imports from abroad, but if foreign currencies are comparatively stronger, then buying power from abroad will mean exports from the country in recession will not fall so much. Sometimes when an economy is growing rapidly, there is aggressive buying including buying of imports, and the trade deficit can increase or its trade surplus can narrow.It can make economic sense for a national economy to borrow from abroad, as long as the money is wisely invested in ways that will tend to raise the nation’s economic growth over time. Then, it will be possible for the national economy to repay the borrowed money over time and still end up better off than before. This occurred in USA during the 19th Century, and in Korea in the 1970’s. Others can find itself in a bind if the incoming funds from abroad are not invested in a way that leads to increased productivity. Several of the large economies of Latin America, including Mexico and Brazil and Argentina, ran large trade deficits and borrowed heavily from abroad in the 1970s, but the inflow of financial capital did not boost productivity sufficiently, which meant that these countries faced enormous troubles repaying the money borrowed when economic conditions shifted during the 1980s. Similarly, it appears that a number of African nations that borrowed foreign funds in the 1970s and 1980s did not invest in productive economic assets. As a result, several of those countries later faced large interest payments, with no economic growth to show for the borrowed funds. In the 1990’s, the ‘so called Tiger Economies of Thailand, Taiwan, Korea, and Malaysia apart from Singapore, faced severe stress on their economies when foreign investors pulled their money out from stocks, banks, property and bonds because they had trade deficits, large foreign FDIs and not enough buffer in their foreign reserves to handle runs on their currencies.What about trade surpluses? Japan’s economy has been teetering in and out of recession since 1990, with real GDP growth averaging only about 1% per year, and an unemployment rate that has been creeping higher. Clearly, a whopping trade surplus is no guarantee of economic good health. The main problem is an aging society and a slowing economy in which consumption does not pick up, and together with high net savings, means that the funds cannot be used in the country and has to be invested abroad. Trade surpluses are no guarantee of economic health, and trade deficits are no guarantee of economic weakness. Either trade deficits or trade surpluses can work out well or poorly, depending on whether the corresponding flows of financial capital are wisely invested. How wisely? Increased federal spending on Medicare may not increase productivity, so a budget deficit is not justified, although if you have high savings and a trade surplus it is certainly justifiable to improve the health of your population. Increased spending on education will increase productivity and foster greater economic growth, so a budget deficit is justified. Increased spending on a space program may not increase productivity, so a budget deficit is not justified. Increased spending on airports and air traffic control or highways and bridges will increase productivity and foster greater economic growth, so a budget deficit is justified. These are some examples.India was formerly under British rule from 1858 to 1947. During that time, India consistently had trade surpluses with Great Britain. Anyone who believes that trade surpluses are a sign of economic strength and dominance while trade deficits are a sign of economic weakness must find this pattern odd, since it would mean that colonial India was successfully dominating and exploiting Great Britain for almost a century—which was not true. Instead, India’s trade surpluses with Great Britain meant that each year there was an overall flow of financial capital from India to Great Britain! In India, this flow of financial capital was heavily criticized as the “drain,” and eliminating the drain of financial capital was viewed as one of the many reasons why India would benefit from achieving independence. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense.In the 1990's, although the Clinton administration was running a budget surplus of 2.5% of GDP, the foreign balance was 4 % of GDP (deficit to the rest of the world in trade and FDI) and in fact the private sector (US firms and households) was having a deficit of 6.5% (the sum of the other two). The private investment was spending 106.5$ for every 100 $ of income. This household debt level accelerated in the years from 1996 to 2006 when home owners aided and abetted by money managers went into the risky mortgage debt securitized and sold by these financial layering experts. By 2007, the US ratio of total debt to GDP reached 500%, or five dollars of debt to service using each dollar of income! The worst part of the problem was the household debt and the rise in financial sector indebtedness to each other from these esoteric and trashy securities in the form of layered derivatives. This was a real bubble and when private debt became too big and consumers stopped borrowing, the bubble collapsed, most identifiable with the Lehman Crisis. Which of course became the Global Financial Crisis. It does seem like borrowing has its limits too.Obama did a lot to get the economy up and moving. He wasn’t given much credit for it. Many of the things he did, Hyman Minsky would have approved. China did a lot of good with its stimulus program and was not really given credit too. The main caveat I would say was that some of the bankers were not taken to the cleaners, which would have reduced the moral hazard. The whole geebang cost the world something like 29 trillion USD in terms of all the originating loans in the scale of default and if President Trump manages to screw up and raise inflation, causing a downturn, you have no backstop. That is going be bruising for everyone, and I really mean EVERYONE except the smart money which is already shorting the futures for the D-Jones.China’s saving rate is high by historical experience, international standards and model predictions and also has been rising over time (especially in the 2000s). Saving by each of the three sectors (household, corporate and government saving) is also high but not exceptional. What really sets China apart from the rest of the world is that it ranks near the top globally across all three components. However, Heston and Sicular (2008) observe a pattern of positive inventory accumulation (more of stocking than destocking) of at least 1 - 2 % of GDP every year. This may suggest possible overestimation of the Chinese saving rate. The second upward bias of the Chinese saving rate is a potential understatement of imputed housing rent. The Chinese rural household surveys suggest that imputed rent is implausibly low, at merely five US dollars a person per annum. Since the imputed rent is both income and consumption for households, it does not affect the amount of their saving but the proportion they save from their income. As a result, China’s gross national saving could be overstated. Imputed rentals are non-cash consumption expenditure. The Chinese rural household surveys report both total and cash housing expenditure, which include rentals, gas and electricity. The difference between the two is a reasonable proxy of imputed rental, amounting to RMB36 or USD5 per capita in 2008. This appears low, given that China’s rural home ownership averages something like 90 %. Third potential bias is the understatement of retained earnings at foreign firms operating in China, which may lead foreign saving to be reported as part of gross national saving, thus overstating both the current account surplus and national saving.Three major microeconomic factors have been key: (a) major institutional reforms including very tough corporate restructuring, pension reform and the spread of private home ownership; (b) a marked transformation process as labour left the subsistence agricultural sector where its marginal product was less than its average wage; and (c) a rapid ageing process. Policy measures promoting job creation, a stronger social safety net and enhanced financing and incentives for provision of social services may contribute to the transition to more balanced domestic demand, which would stimulate domestic consumption, which is now on-going. A high saving has financed strong economic growth, with low inflation and manageable exposures to adverse external shocks. Over the decade 1998-2008, China’s GDP growth registered 10 % plus per annum, while its CPI inflation averaged less than 2 %. Second, it helped shape China’s internal and external balances to an important extent. In particular, a rising saving rate implies a falling consumption share in GDP and hence a highly investment-intensive internal demand structure.Private home ownership. As part of the corporate restructuring, state firms no longer provide housing for their employees and in exchange have increased contributions to housing provident funds (Shen and Yan, 2009). The concomitant introduction of private home ownership and property market interacted with the “second demographic dividend” effect to provide additional incentives to build up pension assets, ushering in a housing boom. The demographic dividend is the effect of the one child policy which may diminish the role of the family in care for elderly, which together with pension reform, increased the need for saving for old age. China’s home ownership may exceed 85 % today (Gao, 2010). Even if one ignores the substantial quality improvement, China’s physical assets of residential housing per capita have at least more than doubled during 1985-2008 . The implied housing investment has been enormous. Indeed, the fastest-growing sectors in the Chinese economy over the past three decades have been the construction and services, not the manufacturing sector. Thus sharply increased demand for housing assets has been a key driver for both high economic growth and high saving in China.Government consumption and expenditure, however, diverged noticeably from each other, especially in the 2000s. The government consumption has been more stable over time, at some 15 % of GDP; but total expenditure swung from 11 % -12 % of GDP in the 1990s to 18 % -20 % lately. One main difference between these two government outlay variables is investment spending undertaken by the government, which is part of government expenditure but not part of government consumption. Therefore, more of the government expenditure is investment rather than consumption. In other words, much of the government income gain has been invested and saved rather than consumed. Why does the Chinese government save and invest but not consume most of its incremental income? First, the anticipation of rapid population ageing and the 1997 pension reform prompted increased pension contributions by the corporate and household sectors. These funds have been invested, directly or indirectly, in financial and physical assets at home or abroad. The rise in government saving could in part relate to the build-up of pension assets. Second, local Chinese government officials have incentives to start new investment projects, as promotions have been mainly determined by performance indicators such as economic growth in their jurisdictions. Hence there is an innate tendency to invest more rather than to provide additional public services for a given rise of government revenues, thus boosting government saving. Nevertheless, once the fixed capital stock has built up sufficiently in the public facilities and infrastructure, this will generate a greater stream of future government consumption and potentially encourage the government to eventually expand provision of social services. Third, there is a so-called federal fiscal imbalance issue in China: while a rising share of fiscal revenues is appropriated by the central government, the lion’s share of the social expenditure burden remains on the shoulder of the less well-funded local governments. Transfers through the central government are considered far from adequate in addressing the financing pressures facing local governments. This tends to put the local governments under funding pressure, which in turn constrains social spending and government consumption. Central government will need to address this.And now to Foreign Exchange Reserves.In China, Foreign Exchange Reserves are the foreign assets held or controlled by the country’s central bank. The reserves are made of gold or a specific currency. They can also be special drawing rights and marketable securities denominated in foreign currencies like treasury bills, government bonds, corporate bonds and equities and foreign currency loans. As of August 2018, China had total official reserve assets of approximately $3,087 billion. This figure included about $71 billion of physical gold reserves (around 2 tons) and around $20 billion worth of (. “IMF reserve position” and “Special Drawing Rights”). It also has foreign debt of about 1.84 trillion in March 2018. China's External Debt accounted for 14.0 % of the country's Nominal GDP in 2017. China's domestic bond market has become more open to foreign investors, with the share of bonds in total external debt rising from 8 percent in 2014 to 21 percent by the end of March 2018. This has become a new source of growth for external debt, indicating the strong confidence of foreign investors in China's economy. Growth in debt owed to foreign creditors came mainly from currencies and the increase of deposits and bonds, and China has been carefully managing its yuan exchange rate to reduce arbitraging between the small pool of RMB outside the country and the larger pool within the country previously.Now that the RMB is part of the basket of currencies in the IMF as a reserve currency, it stands to get a few benefits. The yuan would be used to price more international contracts. China exports a lot of commodities that are traditionally priced in U.S. dollars. If they were priced in yuan, China would not have to worry so much about the dollar's value. All central banks would have to hold yuan as part of their foreign exchange reserves. The yuan would be in higher demand. That would lower interest rates for bonds denominated in yuan. Chinese exporters would have lower borrowing costs. China would have more economic clout. On December 11, 2015, the P Bank of C announced it would begin to shift the dollar peg to a basket of currencies. That basket includes the dollar, euro, yen, and ten other currencies. Demand for RMB-denominated assets will increase over time. That in turns allows the Chinese government to issue more debt in RMB. Thus the share of China’s liabilities in its own currency will increase, mitigating the risk of currency mismatch and overall funding risks in the long term. Over the long-run, the acceptance of the RMB is likely to be followed by greater integration of Chinese stock exchanges into global equity markets, and the gradual emergence of China as an international financial centre, enabling China to create a money transfer system to compete with the widely used “Swift” system; and in limiting the dollar’s use in enforcing political sanctions, experts say. It could also encourage China to accelerate its financial sector reforms, in turn depreciating the RMB to levels the U.S. may not relish.The growing importance of the renminbi could also test U.S. influence on China. After the U.S. moved the dollar from a fixed exchange rate system to a freely floating system in 1973, it began pressuring Japan to let the yen appreciate. That was to protect U.S. goods from cheaper imports from Japan, especially the U.S. automotive industry. With “tremendous pressure” from the U.S., the yen appreciated from 360 to the dollar to 80-85 by 1990. There was an ever-appreciating yen, because the U.S. was muscling Japan and forcing it to do this, through all kinds of trade conflicts and so on. On that front, China will be different for the U.S. China is not going to be muscled around by the U.S., and we won’t have an ever-appreciating RMB. The Chinese will do what they think is in the interest of China. Foreign exchange reserves are used to back liabilities and influence monetary policy. A floating exchange rate system use reserves to keep their value of their currency within a certain range based on the basket of currencies that is used to peg its value. A third, and critical, function is to maintain liquidity in case of an economic crisis. A strong position in foreign currency reserves can prevent economic crises caused when an event triggers a flight to safety. Reserves are always needed to make sure a country will meet its external obligations. These include international payment obligations, including sovereign and commercial debts. They also include financing of imports and the ability to absorb any unexpected capital movements. China has used part of its forex reserves for recapitalizing some of its state-owned banks and to fund infrastructure. By and large, because China is somewhat unusual in that it has high savings, a good trade surplus and prudent fiscal management, it has accumulated huge reserves.

As a Congolese woman, I am saddened by questions like these.Why?Because “Blood Diamond” is a not a good representation of Africa but specific regions of African countries like my own, the DRC, where it is entirely and sadly true.The movie reflects a reality for a large number of people who live in conflict-zones where localized conflicts are instilled and aggravated by multi-nationals and their “trade partners” known as African warlords. The warlords controlled specific regions thanks to militia groups using sophisticated weapons and arms supplied through the black market.There are localized conflicts in the DR Congo, particularly in northeastern DRC. DR Congo is a huge country with the size of Western Europe. It has two time zones. To travel to northeastern Congo, you have to take a three hour flight from Kinshasa over the Congo rainforest, the second earth’s lung after the Amazon rainforest.The roots of war in eastern CongoThe Guardian's award winning Africa correspondent, Chris McGreal, explains why Congo's borderlands with Rwanda have become one of the continent's deadliest conflict zonesThe “Blood Diamond” magnate who is at the center of Och-Ziff’s bribery scandal in AfricaBy Lily KuoSeptember 30, 2016This article is more than 2 years old.The United States’ first foreign-bribery case against a hedge fund is full of dramatic detail.More than $100 million (paywall) in bribes, sometimes bags stuffed with cash, was paid from one of New York’s best known hedge funds, Och-Ziff Management Capital, to corrupt officials in Libya, Zimbabwe, the Democratic Republic of Congo, and other African countries.A private Airbus was rented for a Guinean official while two officials from Niger received an S-Class Mercedes sedan each. Bribes are discussed in casual shorthand over text message: “Yip. Pay the 77m, and we pay 2m withim [sic] 24hr,” one employee wrote of funds to help facilitate a deal in Guinea in 2011.In a settlement agreed this week, after a five-year investigation, Och-Ziff will pay a $413 million fine to settle criminal and civil charges over paying these bribes to African governments for mining and other natural resource deals and investments.The company’s Africa unit has pleaded guilty to being part of a scheme to bribe DRC officials. Daniel Och, founder and chief executive of Och-Ziff, will pay $2.2 million for a record keeping violation. The company’s chief financial officer, Joel Frank, will also be settling charges that he ignored signs of corruption.The settlement is one of the largest under the US Foreign Corrupt Practices Act, which prohibits US companies from paying foreign officials, directly or indirectly, in exchange for business deals. Yet one key player—Och-Ziff’s partner in the DRC—has so far remained unscathed.In a court filing (pdf), the SEC describes him as an ”infamous Israeli businessman with close ties to government officials at the highest level within the DRC.” An Och-Ziff attorney described in an email in 2008 as “perhaps the impetus behind the movie Blood Diamonds [sic].”The way that minerals are mined affects conflict in eastern CongoThe way that minerals are mined affects conflict in eastern CongoAuthorsMarijke VerpoortenAssociate Professor, University of AntwerpNik StoopPost-doctoral researcher, KU LeuvenPeter van der WindtAssistant Professor of Political Science, New York UniversityAn artisanal mine. Fairphone/FlickrStrong evidence links the mining of minerals to local conflict in several African countries. This is because minerals are prized by rebel groups and are a source of their financing. Examples include the “blood diamonds” that were used to finance armed groups in Sierra Leone and Liberia.But existing research makes no distinction on how the two main types of mineral extraction – artisanal and industrial mining – affect conflict. Making this distinction is important. Doing so means policymakers can direct interventions towards reducing conflict.Artisanal mining generally refers to the manual extraction of minerals. It’s often controlled by local elites. It provides working opportunities for up to 20 million people in Africa alone. Industrial mining is mechanised; practised by large, often international, companies. It has close relations with national elites but only provides a few jobs to low-skilled workers.In our recent study, we looked at how two events – changes in world prices of minerals and a surge in industrial mining – affected local conflict in eastern Congo between 2004 and 2015. We found that artisanal and industrial mining had different impacts.In the case of artisanal mines, when mineral prices rose there were more battles between armed groups over the mines. By contrast, when industrial mining was established there were fewer. But we also saw that the expansion of industrial mines triggered riots and also increased violence against civilians.Our findings highlight a need for more security measures at artisanal mining sites. They should be secured, as the industrial sites are, with the help of the Congolese mining police and army to ensure less violence.Linking extraction modes to local conflictWe focused on eastern Congo because it has high rebel activity, high levels of conflict and is well-known for its mineral deposits, mainly gold and the ‘3T minerals’ – tin, tungsten, and tantalum. These three are commonly found in electronics products. It also has a huge database on artisanal mining sites and their locations.Currently, about 382 000 artisanal miners dig for minerals in eastern Congo’s 2,700 mining sites. Because there are so many, the central government struggles to get a grip on them. The minerals they dig up are easily smuggled out of the country, escaping formal taxation. Artisanal mining should take place in clearly demarcated zones. But very few of these exist and only 1% of artisanal miners operate in them. The majority (61%) operate on industrial concessions.To study the link between the mode of mineral extraction and local conflict, we overlay the map of eastern Congo with 2,176 grid cells of 25 by 25 km. For each cell we established whether artisanal and/or industrial mining was present. In total we examined data on 2,026 artisanal mining sites, 3,695 large-scale mining concessions and 6,542 conflict events that occurred between 2004 and 2015.We explored how variations in conflict events – like battles between armed actors, violence against civilians, riots and looting – related to changes in the Congolese mining sector. Specifically, variations in world mineral prices and a surge in the granting of industrial mining concessions.There are other factors that affect violence. But we isolated the impact of prices by studying monthly changes in violence and controlled for all common changes across grid cells – like elections – and for all fixed factors within each cell – like geography.As for the relationship with rising industrial mines, a change in the mining code in 2002 triggered a huge rise in industrial permits – from 237 to 3,368 research permits and 82 to 327 production permits. This allowed us to investigate the sector’s relationship to conflict.Different forms of violenceWe found that both extraction modes, and how they interacted with each other, led to different forms of violence.A rise in global mineral prices led to increased battles, attacks against civilians and looting around artisanal mining sites. We believe this was because of competition between armed groups. Armed actors – like rebels or government soldiers – were present in about 56% of artisanal mining sites.In contrast, at industrial sites, changes in mineral prices had little to no effect on conflict. Our interpretation is that companies can protect their concession against armed groups with the help of private security forces and the Congolese Mining Police and Congolese Army. This also decreased battles between armed actors.However, a move to the industrial production phase increased incidences of violent actions from miners against the company.Industrial companies try to address artisanal miners, who often operate on their concessions, with carrots – like corporate social responsibility programs – and sticks, such as forced removal. But the carrots aren’t enough to accommodate the vast number of miners and the sticks often backfire.Moreover, where industrial production activities expand into areas used by artisanal miners, we found an increase in attacks against civilians and looting. We are currently doing research on this. We believe it’s because armed actors and/or miners who previously profited from artisanal mining try to find other sources of income, such as theft or by levying taxes at roadblocks.Policy implicationsGovernments and policy-prescribers – like the International Monetary Fund and World Bank, which inform the design of mining policies – tend to favour industrial mining over artisanal mining because of its superior revenue-generating potential for the government.While the relation between mineral price increases and local conflict at artisanal sites, and its relative absence at industrial sites, may add to the arguments of those who seek to replace artisanal by industrial mining, there are other important considerations.First, a major difference between artisanal and industrial sites is that mining companies, being backed by the government and national army, are able to secure their concessions. But this is a political choice: there is nothing inherent about artisanal sites that prevents the same type of security. The Ministry of Mines should revise the mining code to formalise and accommodate artisanal mining. It should also employ the army to secure artisanal sites. But first the army must be “sanitised”; it’s currently corrupt and is itself involved in illegal taxing and trafficking of minerals mined by artisans.Second, any policy to expand industrial mining should incorporate measures that protect local mining communities and mitigate unintended economic and social effects, including the effect on the behaviour of armed actors.Global Affairs STRATEGIC STUDIES - Universidad de NavarraThe diamond industry has its main world centre in the Belgian city of AntwerpANALYSIS / Jokin de Carlos SolaThe diamond trade moves hundreds of millions of euros every year around the globe. Most of them come from third world countries were the diamonds are extracted by very hard means. Even today, diamonds coming from conflict zones and used to finance conflicts and violence are a significant part of the market. Nowadays the production is mainly sold in cities of the United States and Europe and most of those diamonds in some way or another end up passing through the city of Antwerp in Belgium, showing that the Dutch and Belgians still have certain control over the industry.This text will explore the origins of the city of Antwerp as a centre in the diamond market and of the control by Dutch and Belgians of this particular business; then it will analyse this industry in the new globalised era, and finally explain the relation of the city of Antwerp and the trade of blood diamonds.Low Lands, a land of diamondsUntil the 19th century most diamonds came to Europe from India through the ports of Bruges, Antwerp and Amsterdam. The origins of the Low Countries as a centre of diamond craft and trade comes from the 15th century. In 1475 a Flemish jeweller, named Lodewyck van Bercken, invented the scaif, a polishing wheel infused with diamond dust and olive oil. This made easier the cutting of a diamond and revolutionised the industry. Bercken was a protégée of Duke Charles de Bold and his techniques were spread all around the Low Countries. For the next years Antwerp and Amsterdam became big competitors in the diamond trade.In the 17th century Amsterdam was the most important city in Europe concerning diamonds. Because of the religious tolerance of the Netherlands, many Sephardic Jews established themselves in the city moving from Antwerp. There they had acquired knowledge working with diamond due to the guild-system, for the only industry that they were allowed to work in was the diamond industry.In 1725 diamonds were discovered in Brazil and most of them went through Amsterdam. During the 19th century over 90% of rough diamonds sold in Europe passed through the Dutch city. Due to the colonial power of the Netherlands, the Dutch diamond trade extended over the world, specially to New Amsterdam (New York) and Cape Town, which would become vital bases of the international diamond trade in the 20th and the 21st century. However, after the mines in Brazil started to dry up and the power of the Netherlands began to fade Amsterdam started to lose importance in favour of Antwerp, its biggest rival on the diamond industry, also a culturally Dutch city that would become the diamond's capital of the world. During its golden age Amsterdam developed a high-quality craft industry, but Antwerp managed to be as effective and cheaper as well as more permissive regarding taxes.In 1866 diamonds were discovered in South Africa, in the Transvaal region, an area mainly populated by Dutch settlers. At the same time the British magnate Cecil Rhodes created the diamond company De Beers, based in Johannesburg. Massive amounts of rough diamonds started then to arrive to Europe, through Cape Town and Antwerp.By the beginning of the 20th century De Beers controlled over 90% of the diamond industry in the world. In 1927 the company passed from the hands of Cecil Rhodes to the ones of Ernst Oppenheimer, a white South African entrepreneur, whose family still controls the diamond trade around the world.During the Second World War most Jews from both Amsterdam and Antwerp were either forced to flee or were sent to extermination camps. This had hard consequences on an industry that was mainly controlled by the Jewish community. After the war, Antwerp quickly rebuilt its diamond business.In 1948, De Beers established a new marketing strategy: it presented diamonds as a symbol of love and marriage, with the motto “a diamond is forever”. A ring with a diamond became the perfect wedding present and it was advertised extensively. This new strategy increased the demand of diamonds, especially in the United States, where not just the economic elite was buying them, but it was also the aspiration of the high-middle class and even of the middle class. As result, De Beers experienced it biggest growth in history turning Antwerp the indisputable capital of the diamond industry.In 1973 the Antwerp Diamond World Centre (ADWC) was established. It is a public/private corporation, founded by the Belgian government and the most important diamond companies in the city. The Diamond Office, an ADWC’s subsidiary, facilitates the import and export of diamonds in and out of Antwerp.Antwerp's diamond industryThe Antwerp's diamond industry is concentrated in a part of the city called the diamond district or Diamantkwartier, which covers a complete square mile. According to the ADWC, 84% of the rough diamonds and 50% of the polished ones pass through Antwerp. In 2012 the turnover of the Diamantkwartier was 54 billion euros. Over 16 billion dollars in polished diamonds pass through the district's exchanges each year. There are 380 workshops that serve 1,500 companies. There are also 3,500 brokers, merchants and diamond cutters. The main actions taken in Antwerp are both the trade of rough and cut diamonds and the cut of rough diamonds with modern machinery. They also perform other jobs like applying colour and crafting jewellery. There is even a bank consecrated to the diamond industry, the Antwerp Diamond Bank, which is owned by the KBC Bank.Traditionally the Jewish community had almost complete control over the diamond business in Antwerp. More than 80% of Antwerp's Jewish population works in the diamond trade. In fact for many years the Yiddish was considered the main language of the diamond exchange. No business is conducted on Saturdays. However, since the late 20th century many Indian, Arminian and Lebanese dealers have increased importance in Antwerp’s diamond trade.For Belgium, the importance of Antwerp as the diamond capital of the world has been a source of economic incomes and great prestige. The diamond trade counts for 5% of Belgium's exports to the EU and 15% of its exports outside the EU; it is the 5th largest industry in the country. It also has been the reason for a lot of foreign investment.During the last decade several other cities outside Western Europe have invested on their diamond industry, like Tel Aviv, Tokyo, Hong Kong, Chicago and several cities in South Africa. However, Antwerp still is the most important trade centre in Europe, being Amsterdam its biggest competitor.In 2017 Antwerp traded 46 billion dollars in diamonds, with a total of 233.6 million of carats. This figures meant a slight improvement, aided by the approval of the Diamond Regime by the Belgian Parliament. This law changed the way of taxation and ended up benefiting the diamond companies of Belgium.Diamonds and political corruptionBecause of its size and the profits it generates, the diamond industry has a lot of influence in Belgian politics, especially in Flanders. It acts as a lobby in favour of specific bills and policies and tries to avoid an increase of regulations. An example of this is when in 1986 an investigation was opened on the business of Abraham Kirschen, who reportedly sold diamonds in the black market to avoid taxation. According to the media, some conservative politicians were linked to the scheme and some 170 diamond traders were investigated for evading a billion dollars in taxes through a bank account in Geneva. The case ended up implicating the second largest diamond company after De Beers, Omega Diamond, and most of the Belgian political establishment. The AWDC rapidly distanced itself from the scandal at the beginning of the controversy, which was to closed without having much negative impact in the industry.Following this and other scandals, the Belgian government managed to impose more regulations, in order to rule a business that traditionally has shown a lack of transparency and has been prone to tax evasion. But the diamond lobby has been very active and through its political influence has scored some victories. In 2011 it achieved its main goal: the change of the Belgian criminal law.In 2008 the biggest fraud of a diamond company was discovered by Belgian authorities. The company was Omega Diamonds, established only in 1994 by the Belgian Sylvian Goldberg. The company became the second biggest diamond company after De Beers and had for many years the monopoly of the diamond exports from Angola. An investigation started in 2006 concluded that the company had created a tax fraud scheme. Omega Diamonds imported diamonds from Angola and the Democratic Republic of Congo through Dubai into Antwerp. During the transfer, documents were manipulated allowing the company to conceal the origin of the diamonds. It ordered the shipment of diamonds purchased in Angola and the DRC to be delivered to entities located in Dubai. Upon arrival in Dubai the diamonds were repacked and exported to Antwerp. The new shipment, marked “diamonds of mixed origin”, was issued with an invoice addressed to Omega Diamonds wherein the value of the diamonds was artificially increased. In so doing, the company was able to hide its additional profit from Belgian tax authorities.In October 2008, Belgian federal police raided the premises of Antwerp-based Omega Diamonds. The raids resulted in a record seizure of 150 million dollars worth diamonds. Companies in Antwerp started to fear similar scrutiny from Belgian courts and the federal police. Because of this, the AWDC asked for political support, and it got help from some politicians, who accused law enforcement of “damaging the reputation” of the diamond industry. A bill meant to block law enforcement from confiscating illegal diamonds, written by AWDC’s lawyers, was introduced by members of the most important political parties of the Belgian establishment.In December 2010, the sponsors of the 2008 bill became members of a secretive group, “The Diamond Club”, in order to push this legislation, which passed in 2011. According to the law, diamond companies investigated by fraud could avoid prison by paying a sum of money to the public prosecutor, as well as fight back the judicial backlog, and prevent, in many cases, a deeper investigation.In application of the law, Omega Diamonds agreed in 2013 to pay a settlement of 160 million euros to avoid being prosecuted for tax evasion and money laundering, all that for a fraud that is calculated to have been of over 2 billion euros. The settlement cleared Omega Diamonds of all charges.The law was controversial, to say the least, and it became very unpopular in Belgium, mainly because almost all parties were involved in it. In 2016 the Federal Constitutional Court of Belgium declared unconstitutional most parts of it. In 2017, the Belgian Parliament set up an inquiry commission to investigate the relation between the law of 2011 and the diamond industry. The commission stated that the blueprint of the law was written by lawyers for the AWDC, but at the moment it hasn't investigated the relations of various politicians with the diamond industry.Blood diamondsA blood diamond is the one that is extracted from conflict zones and used for financing wars or violent actions. They have been a very common threat to the image of the diamond industry and nowadays there is a big effort by various diamond companies of tracking the origin of the stones, in order to avoid scandals. However, during the 1980s and 1990s blood diamonds worth millions of dollars flooded from Angola and Sierra Leone to Antwerp, something that still happens today.Diamonds have a very big value, that’s common knowledge, but in fact a big reason for this value comes from a strategy started by De Beers and followed by other diamond companies. This strategy consists of acquiring the monopoly of diamonds in a certain region and putting them in the market in a way that prices will always remain high. This was firstly done by Cecil Rhodes, and the diamonds in South Africa. If all the diamonds were put in the market at the same time their price will decrease. With this the company always got a big revenue.Before the Angolan Civil War (1975-2002) there was not much concern on what was the origin of the stones. However, during this war the UNITA group started to use the diamonds extracted in their territory to fund its war against the government. This made diamonds a reason for instability and provided violent groups with weaponry. Because of this there was a big international pressure for the ending of the trading of the Angolan diamonds in 1998, by the UN Security Council resolution 1173.A similar situation happened in Sierra Leone with RUF group and its war against government (1991-2002). It is calculated that the RUF extracted yearly a total of 125 million dollars every year. This money was used to fund a war were the RUF committed a series of crimes such as rape, mass killings or mutilations. In the year 2000 the UN Security Council imposed sanctions on diamonds from Sierra Leone.Even though these sanctions were harmful for both rebel movements a report written by Robert Fowler, chairman of the Security Council committee investigating violations of sanctions on Angola, informed the UN that blood diamonds were still being exported from these countries, most of them arriving to Antwerp, where they were sold in the international mark…Child labour in diamond mines in the DR Congo - SwedwatchThe Democratic Republic of the Congo (DRC), is one of the leading diamond producing countries in the world. As widely documented, however, many diamonds that are extracted are done so under difficult conditions. The diamonds are part of a global million-dollar industry that includes markets in Euro. As traceability is difficult, it is difficult to say that diamonds from the DRC do not end up in the supply chains of jewellery companies in Sweden.Swedwatch has visited the DRC’s isolated diamond regions in order to investigate the occurrence of child labour in the artisanal mines. The results of the study, published in the report ”Childhood Lost – Diamond mining in the Republic of the Congo and weaknesses of the Kimberley Process”, are discouraging. Of 49 interviewees, mostly children and adult mine workers, only one person, a government representative, denied that child labour occurs in the mines. In the region, children, primarily boys, often start working in the mines from about ten years old in order to afford schooling and food. Once they turn 14 the work becomes heavier and this leads children to often being unable to cope with school as well. Instead, they start working full-time and forego education. Girls in the mining areas are especially exposed to risks. According to interviewees, forced marriages from the age of twelve is common for many girls in the region.The report also highlights the extensive flaws regarding traceability of the origin of the diamonds. In order determine how Swedish jewellery companies address the human rights risks of the diamond industry, Swedwatch asked seven Swedish jewellery companies about their sustainability work. The results indicate that their implementation of applicable frameworks, particularly as regards human rights due diligence, is low, despite the extractives industry being an extremely high-risk sector from a human rights perspective. This has been well documented in the past as regards the DRC but also, for example, as regards Angola and Sierra Leone.Most jewellery companies refer to the so-called Kimberley Process, the certification available with the most significant reach. However, the certification is internationally criticised since it only regulates that diamonds are not financing armed conflict and it does not include criteria to prevent, for example, child labour or promote the respect of human rights. Therefore, the Kimberley Process’s definition of an unethical diamond does not reflect the current conditions in many mining areas today.The report provides recommendations to private and public actors. For example, Swedwatch urges companies to implement procedures for identifying and preventing possible adverse impacts on human rights in their supply chains. The companies are also encouraged to use existing practical tools, developed by the UN and OECD, in order to address risks. Additionally, they should demand that the Kimberley Process is reformed to include OECD’s guidelines for responsible supply chains of minerals. By working together in a broad and cross-border coalition, the surrounding world can take the rightful responsibility and form strategies to make living conditions better for those who are the most vulnerable.….