About six weeks ago, I left Sierra Leone. The 100 days I spent immersed in the Kono peoples’ lives served as an enlightening experience, which taught me about economic inequalities, perseverance, loving thy neighbor and dedication to ones work. It also served as a constant struggle to contemplate the meanings of social inequality and how the global community can reduce that struggle. I am still attempting to reflect on my experience and trying to take the perspective of the Kono people in the effort to understand the barriers to lifting oneself up by their own bootstraps. It is not something that I can easily articulate. As an economics student, I believe economic inequality and structural inequality is where I can start.
I. The Structures of poverty
Many scholars take the easy way out and blame the culture, poor decision-making, government corruption, chiefs and the mineral curse to rationalize the delay in development. These scholars illustrate crucial issues that plague economic growth, but we need to seek the truth from facts. Western ideology has enabled global economic development and has brought life changing farming innovations, modern technology and affordable health care around the world but yet these developments have been unable to lift the 600 million people from extreme poverty. Less spoken about are the negative effects that are inherent outcomes of Western models. We contend that freedom of speech allows for increased publicity of government corruption but also leads to promising advertisements from casinos or diamond mines. The pursuit of property creates incentives to further our personal wealth and economic growth, but also restricts growth when speculative land purchases drive up price as a result of the intrinsic value. In the United States, we argue that free markets enable growth and that government corruption and asymmetric information, such as unclear export and tax laws, prevent businesses from instituting foreign direct investment. Although government corruption and weak undereducated local officials contribute to the delay in domestic growth, American import laws and farm subsidies contribute to this delay as well. I will argue that within the resource curse, negative and pecuniary externalities serve as the core factors that have delayed development in the Kono District and caused the diamond market to fail in meeting the needs of the local populations.
A. International Superstars and Local Media
With no formal education, an individual can only educate themselves by what they learn from others or external forces, such as the radio. Within the rural villages in the Kono district, there are no more than five radio stations and limited access to educated teachers or models of success (a village with no access to roads, running water, power, sanitation or product variety for consumption would seem like an unattractive place to live for a college education individual). This leaves the local population with very limited or no interaction with individuals attempting to understand their needs or create functional models to help innovate their own prosperity. Therefore, the main external influence carrying advice becomes the radio. All of the stations have advertisements from local diamond dealers promoting a “great price”. These advertisements advance the notion that diamonds make you rich. Every person is beholden to the information available. Constant influence subsequently becomes the strongest influence.
The United States most profitable export is its media; September 2012, approximately one year before my arrival, Rihanna’s single had traveled 5000 miles to Kono. This catchy single did not intend on creating negative externalities, but intentions and outcomes are often different. DJs would play the song “shine bright like a diamond” everyday. At the end of every hour there is a five-minute segment from BBC, but the rest of the hour is interrupted by DJs playing the notorious Rihanna line “shine bright like a diamond.” I cannot begin to understand how much influence these wealthy pop stars have over the general population but they remain some of the only successful American names they know. Other than President Obama, these artists serve as the majority of American influence. Rihanna, Chris Brown, and Eminem are more widely known than Bill Gates or Warren Buffet. I come from a place where not a minute goes by where I have the choice to search through millions of global intellectuals and role models in the palm of my hand, but these individuals are beholden to the five radio stations and the messages they carry.
Both these examples of external influences send messages concluding diamonds are a way to gain economic prosperity. The radio stations, the music artists and the diamond dealers all gain the profits, but the countless independent diggers for these diamonds come home empty handed. An inability to adequately to feed their family, send their children to school, or provide basic needs.
B. Labor Market Efficiency and Employment Opportunities
Within the free market, each individual is trying to create the largest gains to increase personal profits. Independent diggers will spend months or even years searching for the tiny rock they believe will change their lives. The next step is for them to find a buyer. A middleman is also trying to maximize his own gains. This middleman’s goal is to collect as many diamonds as possible at the lowest price he can buy. Of course this allows for more people to enter the market creating price competition, and higher employment, but the externality leaves the independent diggers, with the smallest gains and the hardest work. Our Western notion is that hard work creates success. The extremely valuable diamonds are most commonly found within industrial mines. Moreover, most of a diamonds value is gained after the raw commodity is cut into elegant jewelry. This leaves diamond laborers who find the gems with the smallest share of final profit.
This informal market only accounts for a fraction of diamond exports out of Sierra Leone. The large alluvial diamonds that can be valued up to $70 million or more are found within industrial mining, mining deeper than six feet. Once I asked a South African worker the biggest diamond they found that week and he connected his index fingers and his thumbs. This type of mining requires expensive government contracts and mining equipment that prices out the local population. Where labor is abundant, labor is cheap. No one forces the men and woman to enter the mines, but the eight-hour days digging in the sun leaves them questioning, whether the $2.50 wage was worth it. Someone once described the scene as men with shovels, and blistered hands, all digging deeper into each of their own earthen pits. These conditions seem almost impossible to endure for days at a time, let alone years. But yet, men and women seek this daily wage to make basic ends meet, while hundreds of millions of dollars are extracted from their labor every year. It was no more than two years ago that the labors formed a strike outside the mine. There were 22 gun shot injuries and one woman was shot and killed. Within this same time period, the company that the laborers rioted against, African Minerals Ltd. has rebranded itself, Octea Mining, and increased its output.
C. Pursuit of Property
In the West, many people criminalize chiefs for their inability to service the villages in which they live. This is certainly true and I have very strong distain for these individuals, but when judging someone else we also must judge ourselves. If my ancestors ventured into an uninhabited area and registered their findings with government officials to claim ownership, they would have the right to purchase that land. In the United States, we would allow that newfound wealth, land, to pass down to our offspring. Yet many people will still criminalize the chief’s property claims, which within free-markets would be considered acceptable. I believe that many chiefs in the Kono District are unwilling to sell their land below its intrinsic value because there is the chance that the diamonds below will yield lasting wealth for their offspring. These potential contracts from Western investors may entail millions of dollars in gains. Even if these individuals were willing to sell at the mark value price, it would still leave disequilibrium between the market evaluation, due to speculation, and price a small farmer can afford. This means some would have to sell their property for less than its value, for the betterment of others. Potential financial gain serves as a valid reason to preserve their ownership of their ancestors land. It is a simple investment that they can hold out for the future.
D. Market Valued Interest Rate
At the local Koidu banks, the prime-lending rate is 24%. This leaves massive barriers to entry. As a college educated individual, I cannot think of a small business that could definitively yield a 24% gain in a year, leaving an inability for institutional banks to serve the local community. In the 1990s, a new type of finance, microfinance, has proven to show success around the world, but this is not a one size fits all banking solution. This type of lending requires the same type of attention given to large borrowers but at a smaller level. It includes bankers reviewing personal balance sheets, previous employment and evaluating viability of return on small loans. This increase in attention to smaller projects has shown that banks can decrease lending rates and loan loss rates simultaneously. Often times these loans are given out to existing businesses but in Kono most businesses closed during the war and were restarted within the last ten years, limiting their previous records and proof of sustainability. Rural parts of Sierra Leone are locations where individuals do not have strong enough education backgrounds or previous employment records to qualify for many of these types of loans, once again leaving the informal economy as the lender of last resort rather than institutional banks. This type of lending is restricted by its own ordinance structure and fails to reach the bottom 20% individuals who earn less than $1.25 a day.
E. The State and Viable Tax Rates
Within the United States, individual states battle to attract businesses to come to their state by decreasing tax rates or becoming right to work states. In the Euro Zone, Ireland has attempted to use internal devaluation to decrease the real wage rate to attract external investment. These examples are a Western demonstration of the race to the bottom. Similarly, the West African nations have to race to the bottom. If a state has a high export tax on diamonds, dealers have incentives to smuggle their diamonds across the boarder to a neighboring country to yield a larger profit. An inability to protect the countries hundreds of miles in boarders makes smuggling diamonds an easy task. Therefore, countries have raced to lower their rates to ensure that they can offer the dealer the best price. The overall effect is that the government revenues for development decrease and the profits for the dealers increase. This results in diamonds having little to no positive effect on the communities from which the diamonds originate. The assumed ability to stimulate local economies has been decimated by profit maximization by the unfettered free market. In 2012, 296,334 carats were exported from Sierra Leone. In the first half of 2013, there were 331,471 carats or $102 million exported from Sierra Leone but with the minimal 5% export charge, government revenues only added to $5.1 million. But yet these exports will have minimal effects on the local population with the mean wage at $0.32 per hour (Bankole Kamara Taylor, 83). Firms within this market do not pay a wage that corresponds with productivity because of labor abundance.
II. Changing the Structure
This past November, Dambisa Moyo pointed out that the world is rapidly changing in an era where African leaders are turning away from reliance on private capitalism for economic growth and turning to a new model. The Chinese have dwarfed what private capitalism has contributed to Sierra Leone by committing to a $8 billion infrastructure project that will build a new airport, port, mine, power plant and 155 mile railway. This commitment is approximately 800 times what the government will receive in revenues from the export of $200 million in diamonds this year. It was the United States that innovated the modern transportation system, but it is China that is implementing this system globally in the effort to benefit African countries’ domestic growth in an attempt to create stability as a means to grow Chinese state owned enterprises.
This deal does not fix the problems related to media, property, diamonds, interest rates or viable tax rates. It will certainly not aid Sierra Leone in its effort to create strong government revenues through iron export, but is a step outside the box and a new attempt at development. Similar to microfinance, it attempts to bring an essential part of a functional market to Sierra Leone, an ability to efficiently transport goods and services. It will drive the price of power down to allow more households to benefit from the ability to see at night, and is a fraction of the cost of personal generators. It eliminates the need to take two taxis and a boat or a four-hour car ride to get from the airport to the city, while also cutting transportation time in half. The $8 billion is two times the country’s 2013 GDP. It will allow local businesses to transport products more efficiently. It will drive up the value of the virgin beaches that remain untouched by the hotel industry. Most importantly it allows for small entrepreneurs and businesses to efficiently bring their ideas and products from the rural areas to the big cities.
Our goals should not be to change governments, but to offer people the tools to change their own lives. Create more efficient markets for increased employment opportunities. Empower people to empower themselves. All of these ideas are embedded in the deal brought by the Chinese model. Only time will tell if this stimulus can create more efficient markets that allow tenants to become owners, the poor to be enfranchised, and connect the smallest ideas with the global economy.