Dodd-Frank

Dodd-Frank at 5: How Financial Reform Led to Bloodshed in the Congo

Everything you think you know about conflict minerals is wrong.

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USAID Guinea / Wikipedia

The Dodd-Frank financial reform act turns 5 today. It was signed into law by President Obama on July 21, 2010. In the two years immediately following its passage, violence in the Democratic Republic of the Congo (DRC) nearly tripled.

Think those two things are unrelated? Think again.

According to a working paper from Dominic P. Parker of the University of Wisconsin and Bryan Vadheim of the London School of Economics, there's strong evidence to suggest that "conflict mineral" regulations in Section 1502 of Dodd-Frank directly led to an increase in looting in affected regions of the Congo.

I spoke with Parker about his study. Here's what I found out.

Section 1502 of Dodd-Frank was supposed to make life better for people in the DRC. In the words of Barney Frank, one of the bill's sponsors, reducing the demand for conflict minerals would "cut off funding to people who kill people." To that end, the provision required U.S. companies to report the sources of any tin, tantalum, and tungsten—the so-called 3T metals—used in any of their products. (Technically, gold is also a conflict mineral, but according to the working paper, it's nearly impossible to track and has therefore enjoyed a de facto exemption from the boycott.)

As PriceWaterhouseCooper explains on its website, embargoing 3T metals from the DRC has far-reaching implications for American companies. Practically every electronics product contains some conflict minerals. Tin is even found in the zippers of many apparel items. Thus, in 2010, all these manufacturers suddenly had to find alternative sources for their metal needs.

The result was a drop in demand that caused the DRC's tin, tantalum, and tungsten mines to become much less profitable. Section 1502 succeeded, in other words, at "cut[ting] off funding" to the region's militias. But the militias responded to the change by hurting more innocent people instead of less.

According to Parker, violence increased on two fronts: First, some of the militias in the 3T regions left for greener pastures—in this case, the regions containing gold rather than tin or tungsten mines. They then went to war against the established militias in those places, vying through violence for control of the now-more-lucrative flow of gold.

But other militias saw a different path to replacing their lost income: looting local villages. Indeed, Parker and Vadheim found the incidence of looting increased by nearly threefold in the two years after Dodd-Frank was enacted. As a side-effect, violence against civilians shot up as well.

But cash-strapped militia groups could still generate revenue "by roving—taking civilian assets in unpredictable ways and at unpredictable times, which makes them quite dangerous," Parker tells me. "Our evidence suggests that Dodd-Frank caused militia groups to choose this more violent option."

In economics terms, Parker says, conflict mineral regulations converted many of the DRC's militia groups from "stationary" bandits, which extract taxes from people but otherwise do little harm, into what are known as "roving" bandits.

This, it turns out, is much worse for the people on the ground.

"The roving bandit doesn't have a long-run stake in the economic productivity of a place," Parker says, "so he takes what he can get now with little regard for how his [ransacking and stealing] will affect future productivity."

Meanwhile, stationary bandits have every incentive not to hurt too many people.

For a quintessential example, think of the American mafia. "Because the mafia taxes economic activity, it wants the neighborhood that it controls to be safe and productive," Parker says. "So you get this low-violence situation that will persist as long as the mafia group finds it advantageous to remain stationed in the neighborhood, rather than moving to challenge other [mafia groups] or to loot other neighborhoods."

And in the DRC?

"The militias are like the mafia groups. The mining villages are like the neighborhoods."

Perhaps the most unexpected implication of all this is that, pre–Dodd-Frank, the militias in the DRC were actually serving a beneficial function for the region's inhabitants.

"They were providing security and stability for miners in exchange for a tax on the minerals produced," Parker says. "In a country like the Congo, where official government is so limited in its ability to provide security in remote areas, there is a really important role for the spontaneous emergence of groups that can provide security. And any emergence of a group like that, it requires an incentive. So I do wonder where that incentive will come from if there are international interventions like Dodd-Frank that significantly reduce the value of natural resource endowments."

His concerns turned out to be well-founded.

Not only did violence increase between 2010 and 2012, but various other markers of well-being deteriorated as well. Says Parker: "There's some research that we cite in the paper that argues that Dodd-Frank increased poverty [and] unemployment in these rural mining areas…Dodd-Frank may [also] have caused families to pull their children out of school, because they couldn't afford to send them there anymore."

He even has preliminary evidence showing that infant mortality rates in 3T-mining areas increased after Dodd-Frank's passage. "I don't know of any offsetting gains during the time period that we study," he says.

Ultimately, this is a story about unintended consequences. "It's a cautionary tale about what can go wrong when there's a top-down policy intervention that misunderstands the incentives that the on-the-ground actors face," Parker says. "And you can get a result like this, you can get backfiring, and you can get really nasty consequences."

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  1. TOP. MEN.

  2. the road to hell is lined with glad-handing politicians.

  3. As a person who values personal responsibility I have to say its tough to blame an American law for violence being perpetrated by individuals on another continent. Sure, embargoing things is almost always a bad idea. But embargos don’t cause murder any more than gun rights cause murder. I’d rather hear about how the embargo has impacted electronics prices or something. Evil militias are going to do evil no matter what.

    1. Oh, okay. Just ignore all of the evidence then. The War on Drugs hasn’t caused any problems in South America either.

    2. Black markets always cause violence. Always. Always. Always.

      And the Iron Rules tells us that foreseeable consequences are not unintended consequences.

      So yes. American politicians deserve to be blamed for causing more violence when they create new black markets.

    3. The people perpetrating the violence are directly responsible. But, the people who pushed for feel good legislation that gave said perps incentives to ask even more violently are responsible for the violence they caused by passing legislation interfering with the rights of others to act in their perceived best interest, thus setting off predictable if unintended consequences as people responded to those malign incentives.

    4. Sure. But I can blame these assholes for passing a law they claimed would reduce violence but in fact did just the opposite.

      1. Agorism

    5. Generally, I agree with you. But it sounds like Barney Frank’s intention was to reduce the violence and it backfired. (What? Something Barney Frank did had unintended consequences?)

      1. And Frank could get a pass on this – *if* he was willing to admit his mistakes and work to eliminate the perverse incentives he put into place.

        But he’s not doing that. He’s crowing about how he ended ‘conflict minerals’.

    6. The place was a murdering shithole before. Since profits are evil, getting rid of profits would lead to less murder. The only problem was the profits didn’t really go away, they just shifted around a bit, and the murder wasn’t really the effect of anything external. It was caused by a bunch of murdering assholes. The flaw was thinking that a bunch of murdering assholes would just think, “Oh shit since I can’t make money murdering to get A, I guess I’ll go be a farmer and respect human rights or something.” As opposed to using their tactics on some other commodity.

    7. As a person who values personal responsibility I have to say its tough to blame an American law for violence being perpetrated by individuals on another continent.

      1. If you believe in personal responsibility, the the ‘intervention’ by Dodd-Frank was unnecessary in the first place.

      2. If you believe in personal responsibility and someone deliberately sets up a regime (backed by the threat of violence) to intervene in the affairs of another nation and that intervention changes the incentives to make *doing more horrible shit* even more profitable – then the people who set up those incentives have personal responsibility for the *entirely foreseeable* consequences of their actions.

    8. I might be inclined to agree with you, some guy, except that the PURPOSE of this law was to reduce violence in another county. If the US passes a legitimate law that protects property rights in the US (or some other legitimate governmental goal), and that law has the distant and indirect side effect of increasing violence among some group of people somewhere else . . . I’d agree, not our problem. It’s not the US’s respsonsibility to make sure that other people don’t harm each other. That being said, when the whole (illegitimate) purpose of this US law was to meddle in another country’s business for (supposedly) the benefit of the commoners in that country and it (unintentionally, but foreseeably) has the opposite effect . . . it’s damn well our politicians’ fault, at least partially.

  4. In the words of Barney Frank, one of the bill’s sponsors, reducing the demand for conflict minerals would “cut off funding to people who kill people.”

    If Frank, Dodd or some of their supporters didn’t benefit financially from this, I would be very surprised.

    1. Dodd in particular. Dodd is out there telling people “Hey it’s not perfect, sure there may have been unintended consequences, but HOW MUCH WORSE IT WOULD HAVE BEEN IF WE DIDN’T DO SOMETHING.”

      The neverending cry of the incompetent.

    2. i would be interested to see who was shorting mineral commodities in his office prior to passage

  5. I’ve heard that conflict minerals is a particularly fucked-up regulatory set up, one that makes companies run around without any clear idea of what they’re supposed to do. Thankfully, that’s not a subject-matter area I’ve had dumped in my lap. Not yet, anyway.

    Regulation for the sake of regulation. Not for improving anything. Just to say you passed a law with certain keywords embedded in it.

    Incidentally, I’d be more impressed if it were called Zod-Kal-El.

    1. I’m not in electronics manufacturing anymore, thankfully. But I can tell you that it is a minor logistical nightmare.

      1. It’s a nightmare in any manufacturing that uses metals, because now you have to supply to all of your customers notification that you don’t use any conflict minerals in any of your products and you have to harass all of your vendors who you buy raw metals from that they have to tell you the same thing. There are huge metals producers all over the world – Korea, Japan, China, US, Sweden, etc. that now have to be aware and comply with our dumb laws.

  6. Interesting article for the debate between me and my GF about whether government actually acts like the mafia, but with better PR. She’s a self-described bleeding heart liberal who thinks the government is a beneficial outfit that does good stuff, if you vote the right people into office.

    1. she should travel to Yemen and explain to the parents of murder-droned children that it’s okay because Obama means well. After all, soccer moms feel much safer, and have the benefit of feeling good because they voted for a black man.

    2. Sounds like your GF has never paid capital gains taxes. Whatever you do, don’t marry it.

    3. You mean, because it points out that the thugs in the DRC are the local governments? They were providing “protection” to “their people” in exchange for “taxes”. And once that was unprofitable…

  7. But I just heard Barney Frank crowing during an interview on NPR about how wonderful his bill was.

    According to him, everything went great and none of the bad things the meanies said would happen did.

  8. “by roving?taking civilian assets in unpredictable ways and at unpredictable times, which makes them quite dangerous,”

    Do you know who else….

    1. A King ?

      1. Nah, kings take things on a predictable schedule – they’re the ‘stationary bandit’.

  9. For the last fucking time, foreseeable consequences are not unintended. Did they think the bandits would just beat their guns into plowshares once the source of revenue dried up?

    1. They didn’t care. They passed a law, now they’re done. Just like with healthcare, or wars, or anything else.

    2. If the people creating the consequences are philosophically incapable of forseeing the outcome of their actions, they are unintended. Intentions means just that — they intended to cause something to happen. Doesn’t make them not culpable for the outcomes, just not intentionally malicious.

      1. They’re not though. Or, perhaps there is no such thing as being philosophically incapable. They are capable. They choose to not bother to care about their consequences.

        When I act wantonly with callous disregard I am being intentionally malicious.

        I’ve posed the same thing to my green/left friends. What happens when the ME loses its oil money, assuming some hare-brained scheme to get off oil works? What then? Do you think they will not descend into complete chaos?

    3. I honestly think they did. Much like, you’d think eliminating the Prohibition would cripple the Mafia. Similar thing may happen once US capitulates in War on Drugs (as per The Onion), if drugs become legal, gangs will move into other revenue streams.

      1. So, what happens if the drug war ever does end? Think about how much money flowing into Mexico and the American ghettos would be cut off. What do the outfits on both ends do, not to mention the government’s organized thugs?

        Human trafficking for the cartels, I would guess. What the hell do the gangs in America do? Prostitution, but who really wants to buy a hooker from a street pimp when you can go online?

        There isn’t really a revenue stream for anyone that can replace the sale of drugs. And no one is going into a ghetto when they acn buy a legal and superior product in safe environment. Cheaper, as well.

        1. There isn’t really a revenue stream for anyone that can replace the sale of drugs.

          Probably you’re right. So right now there is a black market that can support N participants. That goes away and the next most lucrative black market can only support N/100 participants (just to pick a number). 100 people are competing for 1 to profit from whatever replaces the drug trade, and those 100 people are used to resorting to violence. Could be bad.

          Hopefully a fair number of people currently involved in the drug trade would go legit and enter the open market. Policies that allow for that would probably be a good idea.

  10. This has been known by Congo activists for years now. More evidence here.

  11. Dodd-Frank. The gift that keeps on giving.

  12. that “conflict mineral” regulations in Section 1502 of Dodd-Frank

    What in hell is something like this even doing in the bill? When your bill has more than 1,500 sections it’s a good sign that it’s larded up with completely unrelated horseshit.

    1. Riders.

  13. And yet, if you were to have opposed the conflict mineral regulations, you would have been vilified as a baby killer or worse.

  14. “Section 1502 of Dodd-Frank was supposed to make life better for people in the DRC. In the words of Barney Frank, one of the bill’s sponsors, reducing the demand for conflict minerals would “cut off funding to people who kill people.” To that end, the provision required U.S. companies to report the sources of any tin, tantalum, and tungsten?the so-called 3T metals?used in any of their products. (Technically, gold is also a conflict mineral, but according to the working paper, it’s nearly impossible to track and has therefore enjoyed a de facto exemption from the boycott.)”

    Black Market correction.

  15. Sure but what’s your solution? Do you like murder? Unless you support another bill of ill conceived onerous regulations that are counterproductive you don’t have another plan. Therefore we had to vote for it.

    1. “We” had nothing do with voting for it. A more regulated product is a more expensive product, and when a product is regulated a monopoly most likely Coroner the market on it.

    2. Restricted free trade created violence. Anyone with a brain would have surmised that additional restrictions would create additional violence.

      Either Barney Frank has admitted he’s too stupid to be anyone’s representative, or he’s admitting he’s evil.

  16. Ultimately, this is a story about unintended consequences. “It’s a cautionary tale about what can go wrong when there’s a top-down policy intervention that misunderstands the incentives that the on-the-ground actors face,”

    But… INTINSHUNZ!!!1!!!!1!!1111!!!!!

  17. . . . conflict mineral regulations converted many of the DRC’s militia groups from “stationary” bandits, which extract taxes from people but otherwise do little harm. . . .

    In other words, it turned these militias from de facto *governments* where the banditry is hidden behind a facade of legitimacy into open bandit gangs.

    1. The thing anyone who plans to ‘fix’ some wrong needs to have in the front of their mind at all times is this:

      The world is near optimal.

      Not that its the best world you can imagine, but its pretty damn close to the best world possible *at this time*.

      So what are the odds that any change you make is going to push us closer to optimal rather than push us away from it?

      Chesterton’s Fence – changes should not be made until the reasons for the existing state of affairs is understood. History is full of bad outcomes that resulted from the failure to understand this.

    2. That was pretty much the take I got from this.

  18. These militias sound like the average Police department.

  19. “Stationary Bandits” is an excellent euphemism for government.

    1. its not a euphemism – its basically the *name* of proto-government.

  20. I remember watching a thing years ago about conflict diamonds and how DeBeers was working hand in hand with international lawmakers to solve the problem.

    It struck me at the time that the legislation was mostly aimed at restricting diamonds that individuals found themselves or that didn’t go directly through approved channels. In other words, the competition…

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  22. I prefer Tin, Iron, and Tungsten.

    1. They are quite into that at the Tokyo Institute of Technology.

  23. Can we please cite this as the textbook example of “the road to hell is paved with good intentions”?

  24. That all sounds believable. It may very well be true. But the skeptic in me wonders if they looked for other potential causal factors. The world is a complicated place.

    It’s not clear to me why a drop in U.S demand for DCR 3T metals would automatically translate into a market crash for those areas. Demand for 3T metals must be high in other countries. China in particular comes to mind. Why wouldn’t Chinese demand support the DCR markets? Is there something I’m missing?

    1. Please see the link I posted upthread. Also this.

      1. And here’s a post from somebody actively involved in charity work in the Congo.

  25. And this is why drug legalization (which is still a good thing) won’t eliminate drug gangs, just like ending prohibition didn’t end the Mafia.

    They will just find other ways to make money. And reasons to terrorize people.

  26. But. But. But! But! They tried! They were trying to make common-sense reforms for the good of the people.

  27. In economics terms, Parker says, conflict mineral regulations converted many of the DRC’s militia groups from “stationary” bandits, which extract taxes from people but otherwise do little harm, into what are known as “roving” bandits.

    God, I hope the “stationary bandits” in the US won’t be converted into “roving bandits”…

    1. I was hoping we could make our “stationary bandits” in the US even MORE stationary by putting them 6 ft below ground.

  28. In the words of Barney Frank, one of the bill’s sponsors, reducing the demand for conflict minerals would “cut off funding to people who kill people

    Poke your fingers into the hornet’s nest, why don’t cha, and see what happens.

  29. ‘”stationary” bandits, which extract taxes from people but otherwise do little harm, into what are known as “roving” bandits.’

    In other words, beaurocrats vs police

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