From FinancialTimes. Story by Andrew England.

Diamonds have helped transform Botswana from an impoverished nation to one of Africa’s richest, where the second-largest diamond ever discovered was dug from its soils last month.

In 2013, Botswana used its leverage as the world’s second-largest diamond producer to persuade De Beers, the diamond producer, to transfer its Global Sightholder Sales department, through which the majority of its diamonds are sorted and sold, from London to Botswana. It was a rare example of a multinational shifting its main operations from a western capital to the developing world. The GSS employs about 160 people, half of them locals.

But two years later, Botswana still faces steep challenges in its efforts to leverage its diamond wealth to create more domestic industries and jobs. The problem has been exacerbated by weaker diamond prices, blamed by De Beers on a build-up of global inventory. “Obviously, it (De Beers’ relocation) hasn’t achieved everything we expected,” says Onkokame Mokaila, Botswana’s minerals minister. The government still wants to see more diamond-related industries creating jobs for locals. “There’s still a lot to be done, and we will be pushing.”

It is not a problem isolated to Botswana. With the decline in commodity prices hitting economies across Africa, there is increasing talk of the need for countries to diversify earnings and add value. There has long been criticism that Africa’s commodity exporters receive too little from their resource wealth. This is partly because of funds lost to corruption and mismanagement but also because many just export raw materials.

Botswana has fared better than most since De Beers first discovered diamonds in the country in 1967. It accounts for about 70 percent of De Beers’ diamonds and has used its mineral wealth to improve infrastructure and state services as it has developed into an upper-middle income nation.

The state owns 50 percent of Debswana, the Botswana mining company jointly owned by De Beers, and receives about 81 percent of the revenue from the diamonds it produces. But unemployment remains at about 20 percent — rising to about 35 percent for the youth — and one in five Batswana live in poverty.

Analysts say the praise Botswana has attracted for its management of its mineral wealth has fostered a sense of complacency, with the economy still too dependent on a finite resource.

Keith Jefferis, managing director of Econsult and a former central bank deputy governor, says that even if Botswana mines diamonds at the same rate for the next 50 years, it will not be a driver of growth. “It underpins current living standards, but it doesn’t drive higher living standards,” he says. “If you look forward, you see if you don’t fix it, there’s problems coming.”

About 15 percent of the $4 billion worth of diamonds De Beers produces annually in Botswana is sold locally so they can be cut and polished in the country. As a result, 20 cutting and polishing factories, owned by Belgians, Israelis and Indians, have set up shop there over the past decade.

But falling diamond prices have meant they have been retrenching, with the number of employees plummeting from 3,800 at the end of 2013 to 2,400, says Jacob Thamage, a government official who is co-ordinator of the “Diamond Hub,” the country’s investment and trade center.

The Botswana operations are less productive than those in India, the main cutting and polishing hub, while the lack of a local supply chain has put “quite a lot of strain” on the sector, Thamage says. “One reason it’s so expensive is if machinery breaks down, they have to fly in from India to fix it,” he says. “If we had a way of encouraging the equipment suppliers to set up factories here, that would give even more sustainability to the business.”

Read more at FinancialTimes.