Russ Roberts

Collier on the Bottom Billion

EconTalk Episode with Paul Collier
Hosted by Russ Roberts
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Paul Collier of Oxford University talks about the ideas in his recent book, The Bottom Billion, an analysis of why the poorest countries in the world fail to grow. He talks about conflict, natural resources, being landlocked, and bad governance, four factors he identifies as causes of the desperate poverty and stagnation in the countries where 1/6 of the world's poorest peoples live.

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0:36Intro. Who are the bottom billion? Group of nearly 60 countries throughout the world with about a billion total in population, but about 70% of the bottom billion are in Africa. Failed to grow, economic stagnation. Divergence from the rest of mankind, 5-to-1 gap, widening at about 5% per year for the last 20 years. Thirty years ago sensible to look at all 5 billion people as developing, but many of those countries are still poor, many like India and Malaysia in that group have made it to middle income status. Challenge now is the stagnating 1 billion.
5:01Four traps. There are within these 58 nations some extraordinarily wealthy people, but most are extraordinarily poor. Book organization: problem definition, diagnosis (traps), prescription. Not one single explanation, but the first of the big four is conflict: 1. civil war, coups, civil violence. It's a trap because once you stumble into this, it's hard to get out of. Some easing off since the end of the cold war, but still very common. Kenya. Transition from dictatorship to democracy has tended to escalate the political violence. Second trap: 2. having a lot of natural resources. Paradox: should be an opportunity. All too often it corrupts the politics creating dysfunctional polity wherein leaders conduct a competition with each other over control. Third trap: 3. being landlocked. Being landlocked without resources means your opportunities for development are very limited. Botswana is landlocked but has resources, but the landlocked resource-scarce countries are the most impoverished. Within Africa, it's about a third of the population. Outside Africa, those regions are parts of countries, but within Africa they have become countries. Fourth trap: 4. low education levels leads to poor economic policies. Reform is accelerated by a critical mass of plenty of educated people. Educated classes often leave. Globalization helps China or India but works against the bottom billion. Capital flight, sending money out of the country, people vote with both their wallets and their feet.
13:19Conflict. Different ethnic groups, Karol Boudreaux podcast. Counterintuitive: the poorer a country, the more likely it is to be in a cycle of rebellion and counter-rebellion. Standard intuition is that a poor country has little to fight for. Partly driven by supply side: if young men have no jobs, no income, no hope, rebel groups find it easy to attract teenage children. In dirt-poor, stagnant societies, government is not good at providing security and not resourced to do it. Countering insurgency is a difficult, skilled task. In the bottom billion, governments try to repress rebellion incompetently, fueling frustration. Causes: government oppression; but rebels often do the same thing. Statistics suggested conflict was more a consequence of poverty than government oppression. During conflict, the economy is destroyed, and risk of return to it is high even afterwards, so investment is low--economic trap.
19:38Natural resources. Analogy between natural resource with low extraction cost and foreign aid in that both allow the government to capture resources at a high surplus--low cost, high value. Oil, diamonds. Not that close an analogy, though. Aid is given by aid agencies and is directed with a certain sense of purpose, comes with advice and capacity-building and conditions, whereas oil and diamonds just bubble out of the ground. Aid is much more effective than natural resource revenue, which can be effective depending on quality of government. Bruce Bueno de Mesquita podcast. Two kinds of aid: well-intentioned vs. part of a nation's foreign policy--to develop an ally as opposed to the good of the receiving country. Temptation even in first case to give aid to pleasant countries than to the bottom billion countries. World Bank has more staff in the middle income countries than in the bottom billion societies, though that's where they are needed. Central African Republic, no resident staff from World Bank or IMF. Staff do not want to work in the bottom billion, argue that they are more likely to be productive in middle income countries. Balance. Why are natural resources so destructive for some countries but not others? Botswana, diamonds, doing reasonably well; Norway, oil. Initial conditions of governance matter. If you get your oil before you get your decent institutions, chances are you will never get your decent institutions because of corrosive effect on politician incentives. Dictatorship example is easy to understand: resource income used to finance an army. But even democracies have these kinds of problems in the very poor yet resource-rich countries. Fall of Soviet Union seemed promising for better economic performance accompanying democracy. Tended not to happen. Democracy didn't discipline the government. Instead, the resource revenues disciplined democracy, resorting to patronage, corruption, and violence. With a dictatorship you might happen to get a good dictator. Kenya, in the absence of checks and balances, incumbent president can declare himself the election winner without getting the most votes. Election fraud happens in more stable democracies, too. Lyndon Johnson's rural Texas vote.
31:22Public spending and natural resources. Opportunity provided by natural resource revenues is to provide a good standard of beneficial public goods. Winning electoral strategy is instead to buy a component through bribery and patronage, squeezing out national public goods. Public purse becomes a common pool resource, something to be looted, tragedy of the commons. Bruce Yandle podcast. Common to all democratic processes, but usually competition would force politicians to serve the electorate. Special interests always are there. But why is it so destructive in these poor countries? Missing checks and balances. We've forgotten what democracy is about. Democracy means electoral competition tells you how governments acquire power; checks and balances tell you the limits on that power. Can easily get elections going even in unlikely circumstances. Checks and balances are much harder, a process, special kind of public good, everybody has some benefit but no one has an incentive to supply them, particularly not the government itself. Have to have the checks and balances in place before electoral competition. Mature democracy has many economic checks and balances, e.g., transparent budgeting, how money is being spent, money can't be embezzled without running the risk of being detected, if caught has to go before an independent court, public scrutiny, investigation, punishment. Free press, third estate, empowers citizens. Mature democracies have set up more and more checks and balances in last 30-40 years, such as independent central banks. Bottom billion societies have none of this. Peru had a free press on the surface, government set about corrupting the free press. One small remaining free TV station broadcast footage of government bribery and brought the government down.
40:25Vernon Smith argued that for future of Iraq revenue from oil should be dispersed into hands of citizens. Bush Administration considered it but decided against it, arguing that nascent, presumably democratic government would need access to it. Rewards for children going to school. Overview: Seems that most of these problems come down to bad institutions, unstable government that cannot protect property rights or prevent conflict. Without those two it seems that little can be done from the outside. Helps to move from bad to good governance. Quote from Preface. Government policies that have been used for other purposes--military intervention, international standard-setting, trade policy--could be used to help the bottom billion nations. International standards are vital. Using natural resource revenues. No current standards. Biggest revenue bonanza flowing into the bottom billion, but the last time that happened there was no sustained benefit. International guidelines could help make clear some decisions points that really matter: saving, investing the revenues, limiting corruption, not frittering away the money. Kenya example sham election: international standards on how you conduct elections would be helpful, backed by some enforcement beyond just observers. Stigma and shame are not enough, need sanctions for elections. Good evidence that even voluntary standards on how to use natural resource revenues are enough. Extractive Industries Transparency Initiative: Revenue reporting to their own citizens. A lot of governments have signed up to it. Kimberly process in diamonds, certifying origin, voluntary and signed on to. DeBeers was shamed by the publicity about violence.
51:26Provision of information. Peruvian government left a little hole in the media that hadn't been bribed. Outsiders could minimally provide information. People inside the countries are often skeptical, though, of those on the outside; used by the governments of these countries. Ultimately these are internal struggles within these countries. Information for reformers to use can help. Ngozi Okonjo-Iweala, Nigerian finance minister, signed on to Transparency Initiative and published it in the newspapers. Newspaper circulation hit its all time high; and she got death threats.
54:57Trade policy. Least well understood. Countries where our trade policies really matters are countries that are coastal but resource-scarce. Countries like Kenya that haven't got the oil that really need our help. Jobs, textiles could transform their economy. Hard for a country like Kenya to break in because Asia already has broken in and has economies of scale driving costs down. Kenya needs a temporary advantage, preferential access temporarily. Africa Growth and Opportunity Act. Similar European scheme works less well--covers wrong countries and has wrong restrictions on products. Kenya is not included, but Somalia is. Madagascar: election resulted in blockaded ports after people voted against him. Agricultural policy. We subsidize production in our own societies and close off opportunities for the societies of the bottom billion. American cotton, proposal that Chad should give up producing cotton. But there's not much else you can do in Chad. Ethanol production has dramatic effects on world food prices; but in bottom billion almost half their income goes to food, so very difficult. Imaginable that higher food prices are helping some of the farmers in these countries, but in these countries it's more likely to be non-basic foods that are the export crops--coffee, tea, sugar.
1:03:54Prescriptions. Jeffry Sachs v. William Easterly, optimist vs. pessimist about potential for aid. Bottom billion have got to succeed. Over the course of the next twenty years there is a lot we can do to help, but we've got to get more serious about it. Last time, development of Europe after WWII, America knew it had to help the European economy's recovery. Changed trade policy, security policy, governance attitudes (OECD), Marshall Aid program. We have to face the enormity of the problem. It's what we failed to do after WWI. Paris Peace conference of 1919, 20 years later it all blew up. Problem is fixable if we do get serious.

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COMMENTS (13 to date)
Jeff Henderson writes:

What has really been jumping out at me in reading about developing countries is how much bad government is to blame.

Tell me what you think of this: If these governments are so corrupt, why don't we just bribe them into making policy changes? ie) We will give you a billion dollars annually only if you allow a free press and institute independent courts that have the power to strike down unconstitutional legislation.

Floccina writes:

I find it hard to believe that having natural resources is a negative. I do not believe that it is a great positive in most cases but not a negative. Look at Canada and USA we both have great natural resources as does Norway etc. On the other side many resource poor countries have the same kinds of problems. After all, the rulers always have accesses to money and power that they can use to distribute goods to their supporters.

As far as land being landlocked countries like Switzerland Austria etc do well.

Also I saw some research a while back that made a strong case that schooling was not necessary to develop.

Is it not a large problem that the national governments often encompass multiple ethnic groups? Small European countries do very well.

Should the west encourage the breakup of these countries into more pure ethnic countries? We could start with Iraq.

The other thing that we could do is allow more immigration but in doing so we risk bringing some of the bad stuff here.

Unit writes:

How much trade is going on within Africa? Maybe it would be easier to start from there, a sort of African Union...modeled after the fifty American states rather than the weird EU model.

Schepp writes:

100% libertarian arguement on what is needed to improve living conditions for the many of the poor: Someone(s) will need to make a profit in doing so. The discussion of wanting to limit poverty is paternalistic. I am not 100% libertarian and paternalistic enough to want to limit poverty, but may be using greed may bring us new insight. I would argue that our government is a market decision. We have a choice between anarchy and government and the greedy choice is government. Clearly their are market gaps and much room for improvement, but it is our best option for now.

Jeremy Weltman writes:

Your podcasts are always illuminating, and the latest with Professor Collier was no less so. Professor Collier's views are extremely interesting. Many of his points are valid but no more so than his focus on bad governance. I also think he he is right to mention the importance of voluntarily signing up to monitoring processes such as the Extractive Industries Transparency Initiative (EITI). Using the example of Gabon, it is my impression that doing so is beginning to create a more transparent process. This is what the IMF has to say in its latest report on Gabon, released this month,
"Regarding oil revenue transparency, discussions focused on explaining the
differences between the data for 2005 that were given to staff and those in the EITI
report. The authorities gave four reasons for why the oil revenue figures provided to staff
were 2.9 percent of non-oil GDP lower than those reported to the EITI: (i) EITI dollar figures
were converted in CFA franc at period average exchange rates, while government oil revenues
are actual treasury receipts in CFA franc, after payments of high banks’ fees; (ii) exclusion
from government revenue of checks received from oil companies late in 2005 but cashed in
2006; (iii) contractual requirements for certain oil companies to invest a share of revenue in
projects not covered by the budget; and (iv) the value of government oil transferred free of
charge to the refinery. Conversely, the EITI report does not cover production by some small
companies. To narrow differences, the authorities are working on reducing banks’ fees;
cashing checks more quickly; and aligning the coverage of the two sets of data. Some of the
discrepancies should be resolved in the 2006 EITI report, soon to be published.

Rutkowskilives writes:

To Floccina,

You're right, having natural resources isn't necessarily negative, so long as there's some diversity to the resources. The issue Collier discusses is when an economy is based around the production of a physical resource almost exclusively. Think diamonds or oil. Having a variety of options for economic development matters significantly. Without that variety, all energies are focused towards profiting from that single resource, and the economy is weakened by being so shallow.

jayesh writes:

illuminating in the extreme. It sounds unintuitive but I agree with the arguments about resources. It is true in India too where the poorest states are rich in minerals but the leaders keep the population poor and uneducated to ensure their reign.

Justin writes:

My favorite part was at the beginning on the mention of how the discussion has changed from "how do 4 billion people become more like the other 1 billion" to "how do 1 billion become more like the other 4 billion." That is real progress, even though there is still a ways to go, and it is encouraging.

Salaam Yitbarek writes:

If I may address a few of the comments made:

1. Jeff, the 'well-intentioned' aid Russ talked about is often a bribe for good policies. Unfortunately, a large part of aid is still not the well-intentioned kind but the kind that _tries_ (often unsuccessfully) to look after our short-term interests. Note that even the well-intentioned aid has incentive alignment and accountability problems. I venture that Western governments' foreign aid departments are perhaps the least accountable (and competent) departments in government since the electorate has the least incentive to care about these issues. Also, recall Collier's remarks about aid agency staff... Anyway, I for one would strongly support a fully transparent and disciplined bribe for good governance program.

2. Floccina, the resource curse only applies if institutions and governance are poor. For what it's worth, there's been some empirical confirmation of the theory. Intuitively, assuming autocracy, you can easily see how the discovery of millions of barrels of oil (or large amounts of aid) would retard moves towards good governance.

3. On breaking up countries into single-ethnic entities... It's been talked about for decades, Marxist thought being one of the catalysts, I think. It's difficult to have a definitive answer of course as this idea cannot be easily tested. There are cases, like Iraq _today_, where this seems an obvious solution. But in most parts of Africa, there are either too many ethnic groups or they are too intertwined. And, in order to create an amicable split, there needs to be a certain degree of negotiation, democratic discourse, etc., institutional (some say cultural) behaviours which are conspicuously absent in the first place!! If parochialism tends to be strong, then even if there's only one ethnic group, people will find other ways to differentiate - Somalia is a good example.

4. Unit, in modern history, there's always been very little formal trade within Africa. You need institutions to trade.

Jorge writes:

I agree with rhe conclusion that the bad goverments cause severe econmic and social problems to such a degree that when you try to correct them the process is large bocause of lags. Few people understand this. For example,when the new goverment after Fujimori (in Peru)tried to carry forwrd a development plan, people hopped that the results were so fast. It didn't happen until now (It is right that we have a country more estable than before). What I mean is that in the process of to go ahead with a country that have past and present problems of corruptions is so difficult. New goverments have to face up to civil conflicts and if they don't able to be transparent and to manage the situation, they will fall in temptation to honour some groups and give short-run solutions. We know that this is no so well. And we Know that goverments are limited, but they still have an enormous powerful to damage the economies. My question is how to reduce corruption so fast?

John Aitek writes:

Africa has bad climate and most African countries are landlocked.

This I believe is an argument for free immigration because those African citizens in hot and landlocked places are not in a location where they are most productive.

Floccina writes:

Certain historians used to say the coal made England great. I find it hard to believe that having natural resources is a negative.

Aaron writes:

Not only do Aid and NGOs not always help, they sometimes hinder. I recall the African economist discussing that all of those NGO's require lots of drivers for their white SUV's, so the chemical engineer, because he is educated and speaks English, ends up as a driver for an NGO instead of doing something more productive.

The stats on the textile trade is very, very encouraging. If I were at an NGO I would be trying to get Asian factories interested in investing in Africa, but not just in clothing.

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