Abstract
The discovery of diamonds coupled with undesirable characteristics of political institutions cast doubts of a natural resource-led growth in Zimbabwe. I used the discovery of diamonds in Marange to provide evidence of waste and corruption of mineral wealth by political elites.
I build on Mehlum et al. (2006) rent seeking model to capture the active role played by powerful agents in the domestic political economy in rent seeking activities. I introduce a new assumption into the model that restricts the entry of producers into rent seeking and free entry of grabbers into and out of grabbing. The discovery of diamonds presents
huge gains for actors who can control access to diamonds. In this case, political elites have the incentive to use their authority to gain control over the valuable resource and use state violence to restrict access of any interested player. The extent to which political elites are successful in rent seeking depends on the quality of institutions. Breakdown in the rule of law enables elites to trade future development goals for personal short-term gains through exploitative ways. With restricted entry into grabbing, producers continue to run productive firms and the entire income from diamonds is squandered by a few political elites. This creates huge inequalities in the distribution of resource rents. On the other end, the free entry of producers into grabbing leads to a loss in efficiency because the entire income from diamonds is wasted.
The model shows a trade-off between efficiency and income distribution. Countries with transparent political institutions that are able to adopt efficient and direct distribution mechanisms in the allocation of natural resource rents benefit most from the supply of valuable resources.