The Bottom Billion

PAUL COLLIER, 2008

 1. FALLING BEHIND AND FALLING APART: THE BOTTOM BILLION:

The Third World has shrunk. It is no longer the 1 billion rich and 5 billion poor; the real challenge in development is that there are a group of countries that are falling behind, and often falling apart. Their populations reside in  a nasty and brutish state of civil war, plague and ignorance. During the golden decade of the 1990’s where global incomes rose, national income in these nations declined 5%. It’s important to make a distinction between the development biz – aid agencies and the companies that get the contracts for their projects and the development buzz – celebrities and NGOs. Remarkably both groups have fundamentally failed to deal with this issue. Within the bottom billion the state is ineffective if it does exist; governments that do hold power are crooked and and have often shot their way to power. Why are these countries failing to lift themselves out of poverty? Think of development as a game of snakes and ladders: there are development traps that prevent the nation from lifting itself out of poverty. Economist Jeffery Sachs has long highlighted the traps of malaria and other health related problems.

The key traps are:

  • Conflict
  • Natural resources,
  • Being landlocked with bad neighbours
  • Bad governance in a small country

Releasing yourself from these traps has been made more difficult by globalisation; a difference from 20/30 years ago. 70% of these people live inAfrica. Africa+ Haiti,Bolivia, the Central Asian countries,Laos,Cambodia,Yemen,Burma andNorth Korea. The middle 4 billion have experienced rapid and sustained growth in per capita income, roughly 4-5%/year. The bottom billion have seen the complete opposite, negative growth in income; some nations (e.g.Somalia) there isn’t even data.India andChina were populated by massive poor populations but manage to catch on to globalisation and penetrate global markets. By 2050 it will be the 5 billion in developed countries and the rest. Focus on poverty reduction/MDGs instead? No problem with growth – the World Bank publication ‘Why Growth is Good for the Poor’. Wrong to suggest growth not needed as some NGOs do. The problem is complicated. Many important development agencies are not well linked up – we need a ‘whole-government’ approach. Required strong political leadership and international co-operation. This book sets out an agenda for the G8 that would improve the plight of the bottom billion.

 2. THE CONFLICT TRAP

 Conflict inherent to politics, but the countries in the bottom billion are stuck in a cycle of prolonged, violent, internal struggles or repeated coup d’états. 73% of people in the bottom billion have recently been through a civil war or are currently in one. War impedes economic growth. Civil war is defined as an internal conflict that involves at least 1,000 combat-related deaths, with each side incurring at least 5% of these deaths. Civil war statistically linked to low income and stagnant or negative growth – the result, poverty and despair – rebel soldiers. Low wealth means a weak state – easier to overthrow a government. Resources are also a crucial economic factor. Cases of companies dealing with rebel leaders to gain concessions in the result of a rebel victory e.g. conflict diamonds. De Beers a role model to companies for reforms made on this issue. Diaspora groups are a key source of funding for rebel groups e.g. IRA and Irish Americans. The bomb that killed 1,400 people inColomboin 1992 was paid for through an Canadian Tamil’s bank account. Most civil wars involve simply a grab for power and with power comes wealth; ethnic strife and divided nations are not the cause. War last longer the poorer a nation is. Resources important, e.g.Angolawhere the government was financed by oil and the rebel UNITA group were financed by diamonds. The average civil war lasts 6 months, the average civil war for the poor lasted 10 times longer. Even when finished, there is risk – the winning side’s government is likely to spend large amounts of key finances on the military. Wars create negative growth, death and mass movements of people. The costs of war are felt long after it has finished and rebel leaders who have claimed to push the country in the right direction are often lying. The armies are often forced into fighting at gun point or left with no other option. Often peace is bought by foreign corporations who need control of the areas resources – e.g. oil companies who pay there way of out uprisings in the Nigerian delta region. Neighbours are always badly affected: economic decline and disease do not stop at borders. The legacy of war is cheap Kalashnikovs. The homicide rate surges after a war. The Democratic Republic of Congo will need around 50 years of peace before it reaches the income level it had in 1960. Coups are slightly different to civil wars, however they show a similar trend.Africais the epicentre of global coups. Wars trap countries dependent on primary commodities from developing. Democracy and the peace it brings are crucial for development; not because they prevent war but because they allow economic growth. Unfortunately societies often cannot install this themselves, hence the importance of the G8.

3. THE NATURAL RESOURCES TRAP

 The discovery of reserves of natural resources can often reduce growth. This is more pertinent when these resources make up a large percentage of economic activity. Only when the income gained is reinvested into other spheres can the economy maintain a reasonable level of income. Around 29% of those in the bottom billion live in an economy where resources dominate the economy. Known as ‘dutch disease’ after the effects the discovery ofNorth Sea gas had on the Dutch economy. Resources discovery causes a currency appreciation, making other commodities, often those which provide the best vehicles for growth, uncompetitive. Natural resources take the place of other export goods in importance for an economy – it no longer needs to be producing goods to gain foreign currency reserves and these industries collapse. e.g. Nigeria in the 1970s after the discovery of oil – peanut and cocoa production collapsed. Agricultural production is not of great importance but it is the labour-intensive manufacturing and service sectors, key components of growth (e.g. India/China) that are hit hardest. The Chief Economist of the IMF blames Dutch disease for the failure of aid, see later for more detail. A further problem is the boom-bust nature of revenue from these resources. Booms often cause large expansions to government spending which is hard to curtail in the advent of a crash. This is when borrowing becomes a serious issue. ForNigeria the oil crash of 1986 causes massive cuts to standard of livings. The IMF attempted to stimulate growth with economic reform and unsurprisingly Nigerians blamed the international financial institutions for the massive increase in poverty. Governance of natural resource wealth is a key problem. Democracy has not been useful to this process – it results in survival of the fattest. Analysis looking at the rents gained from resources exploitation paint a sad story for democracy in the varied cross section of institutional arrangements across the globe (they were often formed before resources were discovered). Without resources, democracy outgrows autocracy. By the time natural resources reach approximately 8% of national income, growth in autocratic states is higher than those in democracies. Democracies are likely to under-invest; politicians are too focused on winning elections to agree what should happen to raise living standards after that election. This is crucial as this is how economies remove themselves from a reliance on natural resources. In democracies, patronage becomes sensible. Votes are not bought by public investment in infrastructure, but on bribery. When loopholes can be exploited in democratic governance, leaders tend to be crooks not altruists. When resources dominate an economy, taxes are low or non-existent and there is no public scrutiny over how government money is spent. Analysis shows that restraints on power significantly increase the chances of growth in resource-based economies; the problem has been that these restraints on power have been removed when money buys votes. InNigeria following the return to democratic governance post-1998, President Obasanjo courageously steered through a law requiring all public investment to be put to competitive bidding. Contracts already agreed were called back in and the average cost on these fell by 40%. These are the types of restraint that cause such economies to lose out on growth. Is autocracy the answer? Ignoring other sectors, in economic terms – no. The reason: ethnic diversity. The greater the diversity, the smaller the support base for an autocrat and the greater the incentive for the leader to redistribute wealth to this group, reducing growth. Democracy does not bring growth; it increases the likelihood for incentives, but does not lead to restraints on governance. It is up to us, the buyers of these resources to make changes that will break this cycle.

4. LANDLOCKED WITH BAD NEIGHBOURS

Jeffery Sachs work has shown that being landlocked knocks about 0.5% of growth rate. There are of courseSwitzerlands, however 38% of those in the bottom billion lived in a landlocked nation and it’s a serious problem forAfricaparticularly. Looking at transport costs gives a good indication of a nation’s development. Countries that are landlocked are heavily dependent on their neighbours and particularly how much they have spent on coastal infrastructure. Poor links to the coast mean it is very difficult to integrate into global markets. For example,Ugandais landlocked – it’s neighbours areKenya(stagnant for 30 years),Sudan(only just emerged out of civil war),Rwanda(suffered a genocide),Somalia(no functioning government), the DRC (with a history so bad it changed it’s name fromZaire) andTanzania(which invaded it). Neighbours matter – growth spills over. The global average is that for 1% growth of a neighbour, a country sees a 0.4% growth in GDP. For landlocked countries, this rises to 0.7%. Coastal nations serve the world, landlocked nations serve their coastal neighbours. Outside ofAfrica, only 1% of the population lives in a country that is landlocked and resource-scarce; it’s an African problem – 30% of it’s population lives in such countries. The growth spill-over effect inAfricais just 0.2%, virtually nothing.

What should a landlocked country do? Increase cross-border trade with neighbours (transport infrastructure and trade policy) and expand regional integration. Finding a specialty and running with it is a good policy too – it attracts regional trade. Develop air travel and internet services (requires telecommunications infrastructure & post-primary education). Make sure those who are educated and have emigrated away make large remittance payments e.g. thePhilippineswhich educates depending on the needs of high-income countries. Create a safe environment for the discovery of resources – the area of resource-scarce, landlocked countries is vast – it seems unlikely there is nothing lying in the ground. Target rural development – these nations are not going to undergo massive industrialisation any time soon.

5. BAD GOVERNANCE IN A SMALL COUNTRY

Coming soon

Advertisements