Free Minds & Free Markets

Dodd-Frank and Death in the Congo

Section 1502 of the Dodd-Frank financial reform law was supposed to reduce violent conflict in the Democratic Republic of the Congo (DRC) by imposing a de facto embargo on tin, tungsten, and tantalum—the so-called 3T minerals—mined in militia-controlled territories. But a working paper from University of Wisconsin economist Dominic Parker suggests the actual outcome of the legislation in the two years after it was passed in 2010 was very different. In July, Deputy Managing Editor Stephanie Slade talked with Parker about his research.

Q: In a nutshell, what did you find?

A: We found statistical evidence that Dodd-Frank backfired. Our latest estimate suggests that Section 1502 tripled the frequency of looting incidents and attacks against civilian populations.

Q: Tell me about the analogy between militias in the DRC and mafias.

A: We developed a simple theory that's inspired by [economist] Mancur Olson's "stationary bandits" metaphor. In our theory, stationary bandits are like mafia groups that tax neighborhoods or industries. And these mafia groups emerge in power vacuums where the state is absent, and they maximize revenues by, effectively, selling protection to civilians. The protection is both against crime they would commit if not paid these taxes and also, importantly, against crime that could be committed by other groups.

What's really important here is that because the mafia taxes economic activity, it wants the neighborhood that it controls to be safe and productive. 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 [groups] or to loot other neighborhoods. In the eastern DRC, the militias are like the mafia groups. The mining villages are like these neighborhoods.

Q: But Dodd-Frank pushed these groups to change their strategy.

A: Yeah. After Dodd-Frank was passed, we theorized that militia groups had three main options for continuing to raise revenues. The first is they could remain stationed in these 3T mining areas and continue to tax mineral production there. But Dodd-Frank made this option much less attractive because it dramatically lowered demand for the 3T minerals.

The second option is the militia groups could relocate and battle other groups for the right to control and tax the gold-mining territories. And this option was attractive to some groups, because the local price of gold stayed high after Dodd-Frank.

The third option is that this militia group could generate revenue by looting villages, and by roving—taking civilian assets in unpredictable ways and at unpredictable times, which makes them quite dangerous.

Our evidence suggests that Dodd-Frank converted these militia groups from the relatively safe stationary bandits to the more dangerous roving bandits. And the roving bandit doesn't have a long-run stake in the economic productivity of a place, so he takes what he can get now with little regard for how his [ransacking and stealing] will affect future productivity.

Q: What is the takeaway if we want to help the people in the DRC?

A: This is a tough problem, but I think the policy solution is not a blanket boycott.

Q: It's almost a textbook story about how, when you change incentives, sometimes people's behavior changes in ways that you weren't expecting.

A: That's exactly right. 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. You can get a result like this, you can get backfiring, and you can get really nasty consequences.

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