Gem Policies: A Grinding Growth September 18 2016

Politics, policies and pundits have once again reached national headlines to decide the future of the Sri Lankan Sapphire. In an island that has broken free from the chains of a civil war and is now poised for exponential and almost explosive growth, the ascent to development and prosperity can be turbulent at best. One such cross wind lies in how the nation reacts to the surge of foreign direct investment and capitalizes the opportunity to jump start the engine of economic growth without destroying what makes it beautiful.

In a report that has been filed to the President of Sri Lanka, the National Gem & Jewellery Authority has asserted that local companies should be prohibited from forming joint ventures with foreign gem mining companies. This view has been supported by the regional ambassador of the International Colored Gemstones Association, among many others, and appears to be heading its way to consolidating the current protectionist stance adopted for the gem industry.

The report highlights concerns arising from a variety of market indicators depicting rising FDI inflows into the Sri Lankan gem market. For example, local firms acting as the hand of their foreign counterparts, have purchased over 100 acres of prime gem-rich lands in areas covering the Ratnapura district and a Singapore based auction has announced that it will include sales of unpolished Sri Lankan origin sapphires for the first time in early 2017. So, what’s the cause for concern?

The first risk lies in the impact on the environment and local habitats. Traditional gem mining, adopted and sustained by local miners, have remained as distinct, small scale operations throughout the past and have consistently recorded low environmental damage. These miners are strictly regulated by national green mining standards and are limited in number as a result of the control in licenses issued. The issue with having large scale investment in mechanical mining operations needs no introduction after what the world witnessed during the ‘Mozambique Ruby’ operation. Further, there is an incentive to avoid large scale destruction of the land and natural habitats as it is crucial to the tourism sector of Sri Lanka.  The gem and tourism industries directly employ over a million Sri Lankans and any disruption to that employment base is likely to be a major concern for the policies put in place by the government. The spillover effects of environmental destruction to the ability of local enterprises to attract tourists from around the world is yet another reason why local activists have resisted the growing FDI inflows to the gem mining sector.

The impact on prices for natural gemstones as a result of higher investment adds another layer of complexity. Foreign interests in large scale mining operations within Sri Lanka have the ability to flood the market with an abundance of sapphires, rubies, topaz, garnets and more. The resulting blemish on the rarity of these natural gemstones can cause prices to plummet and have disastrous impacts on the livelihoods of those employed by the gem industry. Over 600,000 Sri Lankans working as lapidarists, miners, retailers, and wholesalers would have to face a dramatic decline in their state of well-being if their income is slashed by a blunder in industrial economic policies. This proposal for an ‘artificial’ floor in prices for natural gemstones lower the benefits to consumers but it has to be finely managed in order to avoid potential negative externalities arising through large scale environmental destruction, blemishes to the rarity factor of Sri Lanka’s natural gemstones and a potential for a decline in living standards for those employed by this industry.

Controls in price exist not only in the gem industry of Sri Lanka but also in oil producing OPEC nations and in the diamonds supplied by De Beers. Navigating this landscape requires a careful assessment of many stakeholders including the local miner earning a living wage, the general community exposed to the state of the environment and the retail price paid by the customer. It appears that we have reached a situation of Nash equilibrium where one party can’t be advantaged without hurting the other but the policy to be decided will nevertheless keep the engine running.  

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