How Dodd-Frank Led to More Mayhem in Africa

A measure to curb violence from conflict minerals has caused militias to simply expand their looting

By Tate Watkins in the WSJ. He is a research fellow at the Property and Environment Research Center (PERC), a nonprofit research institute. Excerpt:

"When Congress passed the Dodd-Frank financial bill in 2010, it included a provision aimed at curbing the violence caused by these minerals. Companies like Apple and Intel use the metals to make electronic components in devices such as cellphones and laptops. Legislators hoped that by requiring U.S. companies to disclose purchases of tantalum, tin, tungsten and gold, the militias’ funding would dry up.

Rep. Barney Frank (D., Mass.) famously said at the time that the bill was supposed to “cut off funding to people who kill people.” But new research shows the regulation has had the opposite effect and escalated violence in the eastern Congo.

In a forthcoming study in the Journal of the Association of Environmental and Resource Economists, my colleague Dominic Parker and co-author Bryan Vadheim document that while the law may have cut off one source of revenue to armed groups, it led them to intensify their plundering of civilians in the region—exacerbating the humanitarian crisis. By their estimates, violent incidents more than doubled after the law was implemented.

The economists assert that before Dodd-Frank, Congolese militias acted as “stationary bandits.” The idea is that a strongman who seeks to rule for years won’t use his iron fist to crush the people entirely—and he may even invest a bit in roads, security and other provisions to ensure he avoids an uprising that could loosen his control. Messrs. Parker and Vadheim stress that stationary bandits are no saints, but the arrangement “may be safer and more economically productive than anarchy.”

The authors compare the eastern Congo’s stationary bandits to the mafia. They write that some militias charged roughly the equivalent of $1 to enter a mining site and took a weekly cut of miners’ earnings. In return for this “tax,” militias provided a degree of protection—even if only from themselves—as the mob does.

Dodd-Frank upset the stationary-bandit equilibrium because, rather than spending resources to scrutinize a fragmented and opaque supply chain, many U.S. companies simply stopped purchasing minerals from the Congo. The Commerce Department admitted in a 2014 analysis that it did “not have the ability to distinguish” whether specific mineral purchases funded militias, and in August a Government Accountability Office report found that 97% of companies that filed disclosures “couldn’t determine whether the conflict minerals financed or benefited armed groups.”

Companies avoided the extra costs and red tape by boycotting tantalum, tin and tungsten mined in the Congo. They instead looked to suppliers in Australia and Brazil. Congolese mineral exports plunged by 90% in the wake of the legislation, according to DRC mining officials. Consequently, income to militias from such mines either plunged or vanished entirely.

None of this stopped the militias from killing. Some of them pivoted and became “roving bandits,” expanding their looting to make up for lost mining revenues. Mancur Olson, the late Nobel laureate in economics who outlined the theory of both types of bandits, wrote in a 1993 American Political Science Review article that the anarchy and theft wrought by the roving sort destroy “the incentive to invest and produce, leaving little for either the population or the bandits.” Messrs. Parker and Vadheim found that armed groups specifically targeted farmers during harvest time—especially after bumper crops."