RES Public Lecture - The bottom billion

This Royal Economic Society’s Annual Public Lecture, ‘War and Peace in Africa’, was given in London, Edinburgh and Sheffield last December, by Paul Collier of Oxford University. It was based on his new book The Bottom Billion: Why the Poorest Countries are Failing and What Can be Done About It, to be published in May 2007 by Oxford University Press.1

The Third World has shrunk, but we haven’t yet woken up to it. The Millennium Development Goals still track the progress of five billion people. Yet four of those billion live in countries that are either already middle-income, or although still poor are developing very fast like China and India. In contrast, the billion people living in the countries now at the bottom of the global economy are stuck. Income in these economies has been almost stagnant for three decades and so they are diverging at an accelerating rate from the rest of mankind. Most of these bottom billion live in Africa, the other key region being central Asia. These will be the development challenges of the coming decades.

The societies of the bottom billion are not only impoverished, they are prone to civil war with all its attendant disastrous consequences. Some of these consequences are directly economic: civil war reinforces poverty. Others are social, such as mass movements of refugees and the collapse of public health systems. Civil war is often attributed to social or political factors, but together with a young German economist, Anke Hoeffler, I analysed all the civil wars in the world over the past 40 years, to find statistically what accounted for them. It turns out that economic conditions are critical. Countries which are poor, stagnant, and dependent upon natural resource exports are radically more prone to rebellion. In other words, it is not by chance that the bottom billion are often mired in war, it is intrinsic to their economic circumstances.

Explaining stagnation
So, why have the bottom billion failed to grow when the rest of the developing world is converging on the already-rich countries? I think that there is no single, over-arching explanation: the countries of the bottom billion have failed in several distinct ways. One has been the conflict trap: once a civil war has started it usually lasts for many years and even when over it leaves a legacy of a greatly heightened risk of further violence. Another trap has been the potential blessing of valuable natural resources such as oil. Although it is possible to use the revenues from these resources for development, as has been done in Botswana, the more common reality is that this easy money so undermines governance that it impoverishes the country, as happened in Nigeria. Together with a young Dutch economist, Benedikt Goderis, I have estimated how natural resource exports affect growth using global data over 35 years. We use a statistical technique termed ‘cointegration’. From the results we simulate how Africa’s current commodity booms will play out in future years. If history repeats itself, although in the first few years incomes will be higher, in the long run Africa’s economies will be further undermined. A third explanation for why a country might be trapped in the bottom billion is if it is landlocked and surrounded by neighbours who are themselves in one or other of the traps. Being landlocked closes off many of the key opportunities that globalization has generated, and that the coastal countries of Asia have harnessed. If you are landlocked, the best hope is to become a hub for the neighbourhood, but that depends upon the neighbours having successful economies. For Switzerland being landlocked is no problem, its neighbours are Germany, France and Italy; but how about the Central African Republic? Find it on a map and you will see why the neighbourhood opportunities might be limited. A final explanation is that a country can get stuck with very poor economic policies and governance which kill the growth process. With Lisa Chauvet, a young French economist, I have investigated why some countries take much longer than others to pull out of bad policies and governance. It turns out that societies with small populations and little education take much longer to reform: perhaps reform needs a critical mass of educated people. The countries of the bottom billion are mostly small, and have chronically low levels of education.

Although globalization is powering growth for the four billion, it is not working for the bottom billion. Indeed, the very success of the four billion has made it much harder for the bottom to get started. Suppose that a coastal country of the bottom billion succeeds in establishing peace and responsible policies and governance: what then? Can it follow Asia into the global market place for labour-intensive products and so converge? The major obstacle to success is that Asia is already established: it has large clusters of exporting firms and these clusters lower costs of production thanks to economies of agglomeration. For example, 60 per cent of the world’s buttons are now made in one city, Qiaotou, China. A button manufacturer in Qiaotou benefits from a massive pool of skills and suppliers that would be lacking if it rebased to Accra in Ghana. When Asia broke in to global markets it was the first low-wage producer with wages about one-fortieth of the established producers in the OECD. Its low labour costs could compensate for its initial lack of agglomeration economies. The bottom billion do not have an equivalent offsetting advantage since Asian labour costs are nowhere near forty times higher than those in the bottom billion.

Helping the bottom billion
So what can be done to help the bottom billion? To date we have relied too much upon aid as the instrument for development. Politicians like aid because it enables moral grandstanding: giving aid is like saying ‘I care’. But although the problems of the bottom billion rightly engage us morally, the solutions do not jump out so simply from moral imperatives. Complex problems require a more serious level of analysis.

Although aid is not usually ‘part of the problem’, in bottom billion conditions it is often a pretty weak instrument. For example, giving more money to badly governed and resource-rich countries is unlikely to foster decisive change. What else can we do? Three potent instruments have been neglected. One is peacekeeping and security guarantees. Where there is a high risk of civil war, as during the first post-conflict decade, peacekeeping troops are usually the most effective way of maintaining peace and thereby helping the economy to recover. The British troops that have been maintaining the peace in Sierra Leone are about the most effective development assistance Britain has ever provided to Africa: the cost has been modest and the benefit to desperately poor people enormous. Sierra Leone needs to become the norm, not a shining exception to the usual story of neglect.

A second potent instrument is trade policy. Thinking about trade policy suffers from the same moral grandstanding as aid. ‘Fair trade’ is unfortunately not the trade policy that the bottom billion need. Nor is the inward protectionism that Christian Aid so idiotically championed in its recent campaign against African trade liberalization: a campaign which three of the world’s most eminent trade economists condemned as misguided. The trade challenge is that coastal Africa needs to break into global markets for labour-intensive products but it is uncompetitive because it lacks the established agglomerations of Asia. Africa needs temporary protection from Asia in our markets in order to get started. Both the USA and Europe already have such schemes, but with trade schemes the devil is in the detail. I decided to investigate whether they worked. As you may have noticed, much of my work is with young economists from continental Europe. I would be delighted to work with young British economists but in my field there aren’t enough of them. However, for this project I was fortunate to team up with a world-class British economist, Tony Venables, the Chief Economist of the Department for International Development. We found that the American trade scheme, the Africa Growth and Opportunity Act, has been highly effective in raising African exports. The European market is potentially far more important for Africa than the American market, but unfortunately our scheme, Everything but Arms, has been driven by gesture politics rather than economic analysis. It is so badly flawed that it is useless.

A final potent instrument is to set international standards and codes of governance that are pertinent to the distinctive problems of the bottom billion. The Extractive Industries Transparency Initiative, launched by Britain in 2002, is a good example of what is needed. Its main objective was to get greater transparency into oil revenues so that citizens in oil economies could at least find out what their government was receiving. Reformers in Nigeria promptly adopted it as their benchmark of improved governance. But the EITI is just a start. Even in respect of the problems of natural resource revenues it merely scratches the surface. Standards and codes have huge potential as rallying points for reformers within the societies of the bottom billion.

Reversing the divergence of the bottom billion is indeed, in the end, as much a moral struggle as a problem in technical economics. But the morality story is not about an evil rich world and its victims, but about a struggle within the societies of the bottom billion between the powerful forces of the status quo and the brave voices for change. We need to get behind those brave people. To date, our moral posturing has crowded out our real opportunities to support them.


Note:

1. The underlying research papers are on Professor Collier’s website: http://users.ox.ac.uk/~econpco/ The lecture can be viewed at http://www.res.org.uk/society/lecture.asp

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