Poor Institutions or Unfair Power Dynamics? Notes from Sierra Leone’s Alluvial Diamond Industry

For resource-rich countries like Sierra Leone to attain any sustainable development, issues related to the criminalization of natural resource extraction must first be addressed.

For decades, scholars and policymakers have pondered how best to manage natural resources for the betterment of national sustainable development. For some scholars, the negative relationship between commodity endowment and socioeconomic growth is what prevents national sustainable development. Others go further and implicate the poor institutions used to mobilize domestic resources. A key example of this is the alluvial diamond mining industry in Sierra Leone, where a lack of strong and accountable institutions means the state loses valuable revenue generated from the resource. While such arguments have their validity, the role of the global financial system—and the imbalanced power dynamics inherent within it—is often missing from the literature on natural resource management. To better understand this, it’s important to know how countries like Sierra Leone have arrived at their present condition and why many countries struggle to move past this reality. Overall, there needs to be a more nuanced and deliberate understanding of underdevelopment, as well as targeted and specific solutions towards addressing some of Africa’s major and persistent development challenges. 

Institutional Frameworks and the Importance of Good Natural Resource Governance 

Institutional frameworks are considered the foundations of political, economic and social interaction. According to Douglass North, they provide the incentive structure of an economy, and ‘as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline’. For Sierra Leone, economic institutions that encourage the transparent use of diamond revenues will be crucial to economic growth. In addition, political institutions with well-defined legal objectives decrease the risk of opportunistic behaviour, thereby preserving societal stability. A country’s political economy is, therefore, dependent on how effectively its institutions operate, making both economic growth and socio-political stability conditional on institutional strength. Without this, factors conducive to national conflict—such as lawlessness and ‘rent-seeking’—will impede socioeconomic development.

In Sierra Leone, there are historical and ongoing examples of patron-client relations. A lack of respect for the rule of law has tended to characterize the nation, indicating a weak or poorly managed institutional framework. For example, research in Kono District shows that issues related to smuggling, bureaucratic rent-seeking and conflict between the youth and rural gerontocracy still continue. When this occurs, the cost to national development is huge and wide-ranging, including reduced prospects for economic expansion and an increased likelihood of civil and international conflict. By contrast, in countries such as Botswana, where higher standards of governance and political stability have been maintained, diamond revenues often contribute to national sustainable development. Such success is due to the country’s structural change in patterns of production and fairer distribution of resources, incomes and opportunities. 

Sierra Leone’s case is, therefore, particularly interesting. Despite its attempts to improve its institutional framework for governing natural resources by joining the Kimberley Process Certification Scheme (KPCS) in 2002 and the Extractive Industries Transparency Initiative (EITI) in 2008, the country still fails to transcend its ‘diamond curse’, as issues related to poverty and poor working conditions in mining communities remain. Sierra Leone’s British colonial government laid the foundation for this curse, as the overall motive for colonization was less about acquiring territory and, according to Paul Munro, more to ‘establish control over (and increase) the extraction of valuable commodities for the benefit of the imperial core’. That is, the ‘extractive’ formalization and institutionalization of natural resource exploitation, which permitted the British elite to rule over and exploit the indigenous population, was the key focus of the British colonial government. Therefore, during the colonial era as well as today, diamond revenue was never actually meant to benefit the local population through either formal employment opportunities or rural development.

In the contemporary era, Sierra Leonean leaders have continued this trend. Under then-President Siaka Stevens’ All People’s Congress (APC) government, in power from 1971 to 1985, the leader ensured that only his bureaucratic elites had access to diamond wealth. This deprived the general population of any additional revenue from taxation that could have been invested in community development. In Sierra Leone, diamond revenue has been repeatedly misappropriated by elites for private gain. This low national productivity, combined with a failure to attract foreign investment, has meant that Sierra Leoneans have tended to engage in illicit mining, corrupt practices and patrimonial politics. The implication is that Sierra Leone’s institutional framework has never been adequately arranged at the local, regional or national level to effectively manage alluvial diamond extraction with the intent of keeping revenue within the country. 

Multinational Corporations, Global Finance and the Dangers of Myopic Analysis 

While factors like corruption, illicit activities, and patrimonial politics are crucial to the literature on natural resource management, they do not necessarily tell the whole story. Conspicuous by its absence is the role of the global financial system (GFS), which adds an extra layer of complexity to national socio-economic development. 

For resource-rich countries like Sierra Leone to attain any sustainable development, issues related to the criminalization of natural resource extraction must first be addressed. However, this is often impeded as multinational corporations (MNCs) use clandestine tax-dodging techniques, such as transfer pricing, to avoid taxation. Some have even been accused of funding armed conflicts in resource-rich countries to destabilize and loot mineral wealth. Without adequate taxation, checks and balances on government, and corporate social responsibility in place, Africa will continue to haemorrhage billions of dollars. MNCs will continue to fail to pay their fair share in taxes and will still employ some of the most treacherous extraction methods with complete disregard for national governments and local people. 

There are numerous examples of this. The Corner House NGO has accused MNCs of bypassing national government legislation and distorting domestic decision-making. In Nigeria, Pambazuka News reported that intricate schemes exist to offer bribes to elites in exchange for ignoring MNC exploitation of the oil industry. A 2000 UN Expert Panel report on the illegal exploitation of natural resources implicated the diamond company, DeBeers, in plundering the Democratic Republic of Congo’s wealth. Such factors have the potential to undercut any attempts at creating government discipline and integrity. 

In Sierra Leone’s case, a specific example can be found in the dishonest role played by Koidu Limited, a Sierra Leonean mining company. According to the International Consortium of Investigative Journalists, the 2015 Panama Papers showed Koidu Limited to be owned by another mining company called Octea Mining Limited. This organization, in turn, owned a series of offshore companies to which it transferred wealth. Unsurprisingly, Sierra Leonean lawyers accused the company of evading hundreds of thousands of dollars in local property tax, money which the government could have used to support national development through employment creation and social welfare. 

By overlooking the role played by MNCs, Western scholarship exonerates Western organizations from any responsibility in the mishandling of African natural resources. They, instead, choose to shamelessly redirect blame from Western actors onto Africans for their apparent ineptitude to govern when, in reality, the main causes of underdevelopment, scholars like Walter Rodney have argued, lie outside the continent. There is a symbiotic relationship at play between MNCs and resource-dependent countries, as it cannot simply be the case that African leaders are incapable of managing their natural resources. Discussion of this situation must be more critical. Policymakers and academics should be encouraged to explore the power dynamics that underlie Africa’s integration into the GFS, and how these factors impede effective domestic resource mobilization methods. By acknowledging this added dimension, one becomes cognizant of the critical role that the asymmetrical power dynamic between core-state corporations and peripheral nation-states plays in the mismanagement of natural resources. 

The implication for Sierra Leone, as well as for many other resource-dependent countries, is that their development will continue to be impeded because of resource exploitation enabled by power imbalances in the GFS. These countries will be confined by an inescapable vicious cycle of unsustainable development.

Beyond the Debate and Strategies for Moving Forward 

The mismanagement of natural resources has far-reaching implications. In Sierra Leone, diamonds have not had the same transformative impact on society that other diamond exporting countries, such as Botswana, have experienced. If this trend continues, Sierra Leone will struggle to achieve the UN Sustainable Development Goal of eradicating poverty by 2030. Given that approximately 53 percent of Sierra Leone’s population still lives in poverty, this is particularly worrisome. 

The issue of tax evasion should also not be overlooked, as evidence suggests that it negatively impacts the morale of the population by reducing citizens’ confidence in their government. This can reduce the number of willing taxpayers as the social contract between the state and its citizens is strained. More concerning, however, is how tax evasion exacerbates the self-perpetuating relationship between inequality and poverty. National poverty cannot be tackled unless inequality is first addressed, because the two are self-reinforcing constituents. As the culprits and beneficiaries of tax evasion are the wealthy, they can be shielded from the negative impact that their actions have on society by either leaving the country or transferring wealth abroad. Poorer nationals are left to suffer the domestic consequences of increased poverty due to limited social welfare and reduced living standards. Poverty is therefore increased due to greater inequality. Under these circumstances, economic inequality can also lead to social unrest and conflict, as has been the case in the Central African Republic, Libya, Nigeria, South Sudan, among many other countries. 

For these reasons, it is crucial to find strategies to reduce the mismanagement of natural resources in order to attain sustainable development. One potential solution is to improve the absorptive capacity of institutions, meaning that a country uses its financial resources effectively to improve the social well-being of its citizens. High absorptive capacities can overcome serious financial, technical and human constraints, thereby facilitating development. A possible method for policymakers to do this would be to integrate the relevant institutional mechanisms involved in resource management, such as anti-corruption agencies and mining ministries, with policy and planning agencies. This would create a central natural resource governance authority with formal accountability and transparency, the two pillars Western academics argue are needed for good institutions. 

African countries should also look to regional integration to leverage support from one another, in order to encourage cross country exchange of information and institutional transparency. In this case, the aim would be to promote the harmonization of mineral policies and regulatory frameworks, helping institutions to share data, resolve internal blockers to sustainable development and, most importantly, collectively challenge the current configuration of the GFS. Needless to say, the most important strategy for moving forward must be good leadership. Without an honest and dignified rule, none of these suggestions are likely to come to fruition. 

Ultimately, domestic resource mobilization efforts haven’t made much progress due to the failure of authorities to securitize and formalize natural resources. African policymakers should, therefore, think critically about how to hold themselves and MNCs accountable for losses in state revenue, and how such challenges should be remedied. In doing so, the hope would be that they can find adequate solutions towards increasing their influence in the GFS, thereby minimizing the continued exploitation of their natural wealth

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