Some notes I’ve made on Paul Collier’s The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It.

The problem

Five billion people in the world are living in developing and growing economies. One billion people in the world are living in conditions no better than in the preindustrial era, in areas of conflict, disaster, disease and low life expectancy. The Bottom Billion offers a diagnosis as to why this is the case for a number of countries, mainly centring on Africa and Central Asia.

Civil war is much more likely to break out in low-income countries: halve the starting income of the country and you double the risk of civil war.

At the same time, civil war reduces income. A low-income country faces a risk of civil war of about 14% in any 5-year period. The anticipation of war causes a decline in income. Resource rich countries are considerably more prone to war, as natural resources can be used to finance war. People who join rebel forces tend to be motivated by the prospect of riches, and these are the ones who usually end up in charge. This makes reform harder for members of rebellions who care about social justice. This is the conflict trap.

Democratic rights, hard as they are for a people to establish, do not reduce the risk of civil war, and they do not reduce the risk of coups. When the growth process fails in a low-income society, it is exposed to risks that are hard to contain.

Countries with large resource discoveries end up poorer due to the rentier effect. All bets are off as to producing normal economic activity when natural resources are in play. Resources produce volatile revenues. When prices go up, spending shoots up, which is difficult to control when prices come back down? In addition, resource rents reduce the pressure to build exports. Income generally falls as a result. This is known as “dutch disease”

“Resource rents make democracy malfunction.” Surpluses from natural resource extraction are unsuited to electoral competition, as it lets in the politics of patronage. It may be easier to buy out your voters than provide public services. We can improve the situation by introducing more checks and balances. An example:

“For over a decade prior to 1979 Nigeria had been run by military dictators. To general relief, in that year the country returned to democratic civilian rule, electing Shehu Shagari president. Unfortunately, his regime turned out to be a classic example of patronage-driven electoral competition unrestrained by checks and balances. One of the government’s first acts was to recall a massive pubic investment project for a dam that had been awarded under the military government. The project was rewarded, but its cost according to the new contract rose from $120m to $600m. Politicians had spent a fortune buying the votes that got them elected, and now needed urgently to recoup their investments; their means to do so was a profit from the dam project”

However, this is not an argument for ending democracy. Autocracy only seems to work well for societies which are not ethnically diverse (ala China).

Being landlocked with unfriendly neighbours makes building an economy a lot harder – exports are difficult.

The small countries of the bottom billion suffer from poor governance. This is likely to be due to a lack of educated people in the country (most will have fled) to enact real reform. This reduces the probability of turnarounds succeeding.

The chance of escaping from these traps in any one year is about 2%. What does this mean in the age of globalisation? Collier believes that the bottom billion have missed the boat, and provided they are able to escape the traps, it will be harder to develop their economies. This is because; there is not enough of a difference in production costs between Africa and the Far East. Investment is attracted towards safe, middle-income countries. Reformed countries have a tough time shaking off their recent past. This means they are often ranked at higher risk than they should be by global business elites.

What to be done?

Aid

Aid as budget support often doesn’t work. In one study, less than one percent of aid allocated for rural healthcare was delivered. Aid above 16% of GDP is subject to “diminishing returns”.

Collier and Hoefller have estimated that around 40% of Africa’s military spending is inadvertently financed by aid. There is a case for donors to restrain military spending.

Collier believes that aid is not an effective measure for what it is designed to do – lift as many people out of poverty as possible.

In the conflict trap, big oil makes conflicts more likely to happen, but aid makes coups more likely to happen.

The problem of policy conditionality (or structural readjustment)

“The use of aid as an incentive for policy improvement was initiated in the 1980s…It was a pretty hopeless failure. There were two basic problems with it: the psychology and the economics. They psychological reaction to being told to do something is resistance…So conditionality pushes governments and indeed whole societies into opposing policy changes that would have been highly beneficial. Policy conditionality also messed up accountability. If governments were being ordered about by donor agencies, whom should an electorate, blame if things went wrong? Governments were quick to exploit the full potential for evading responsibility. In the week when the government of Zimbabwe launched economic reforms in 1998, its minister of information told the local press, “They’re not our reforms, they’re the IMF’s. We had to do them” That sort of statement not only shifted the responsibility but made the reforms very easy to reverse. And the government of Zimbabwe most surely reversed them.”

So, how do we initiate the transference to good governance?

“I take a very different view of governance conditionality. The key objective of governance conditionality is not to shift power from governments to donors but to shift power from governments to their own citizens. The struggle for this transfer of power took around two hundred years in Europe, and we should indeed want to speed it up in the bottom billion. External pressure was vital in the European struggle. The most common account of that struggle goes as follows. The threat of war forced governments to defend themselves with big armies. To pay for these armies the governments needed to tax. To get compliance for high taxation they had to concede representation and scrutiny. We cannot go through that process in the bottom billion. In Europe the threat of war turned into a reality sufficiently often for the whole process to have been murderous, and it would probably be so again. It was slow. But the purely internal processes by which citizens force governments to accept scrutiny are probably pretty weak. External pressure is needed. And it is entirely legitimate. Why should we give aid to governments that are not willing to let their citizens how they spend it?”

What about the countries own reformers?

“Imagine being a schoolchild in a bottom billion country on the eve of independence. The bright children in the class aspired to join the cilv service to help build the country. At the other end of the class, what were the aspirations for the dumb class bully? Forget the civil service with its tough exam. So the class bully set his sights on the army. Fast-forward two decades and a coup d’état. The army is now running th government. Between the class bullies, now the generals and their objective of looting the public sector stood the class stars now running the civil service. The generals didn’t like it. Gradually they replaced the clever with people more like themselves. And as they promoted the dumb and corrupt over the bright and the honest, the good chose to leave. Economists have a term for it: “selection by intrinsic motivation.””

Military intervention

How (not) to intervene

“In 2000, the RUF rebel movement [in Sierra Leone] took five hundred [UN] soldiers hostage and stripped them of their military equipment. Was the RUF such a formidable fighting force? Hardly – once a few hundred British troops arrived a few months later, willing to take casualties, the whole rebel army rapidly collapse. The UN troops were an easy target because the RUF understood that they would not resist. They were carrying their guns like tourists flaunting their jewellery.

…Sierra Leone rather than Iraq is the likely future of intervention opportunities in the bottom-billion countries. Look at the contrasts between the two situations. In Sierra Leone our forces were invited in by the government and hugely welcomed by the local population. In Sierra Leone we could not be accused of going in for the oil, as there wasn’t any. In Sierra Leone we did not have to worry about “fixing what we broke,” for there was not much to break, and we ousted the RUF with minimal damage. In Sierra Leone we needed less than a thousand proper soldiers to achieve decisive military change. The differences seem obvious.”

What about domestic troops in postconflict situations?

This is a time consistency problem:

“In postconflict situations, neither side trusts the other. The rebels face the greater problem because governments can maintain their armies during peace much more easily than can the rebels. So although the government has an incentive to promise an inclusive peace deal, as time goes on it has less and less of an incentive to keep its word. As a result, there are sure to be factions among the rebel forces wanting to go back to war pre-emptively, while the option is still open. High military spending by the government may inadvertently signal to the rebel forces that the government is indeed going to renege on any deal and rule by repression.

…Mozambique’s Prime Minister Luisa Diogo gave us the example of her own country. Completely bucking the usual trend, her government has radically cut military spending to virtually nothing, and the peace had endured. It turn[s] out that, far from favouring big military budgets, finance ministers wanted evidence to defend their spending priorities against the demands of the powerful military lobby”

Changes rich countries need to make

Financial and banking reform

The banking pimps who hide away extorted money must be thrown out of the banking profession.

The new anti-bribery laws must be vigorously enforced. Bribes can currently be dressed up as “facilitation payment” for some service [see the recent Newsnight about the dumping of waste].

Other than finance and banking, construction and resource extraction are particularly corruption prone.

Creating norms and laws

Eastern Europe adopted fairly transparent market economies because they had a strong incentive – membership in the European Union. The further away a country from the EU, and the lower its prospects for joining, the worse the country has done.

The bottom billion needs rules that are appropriate for societies at their level of development that address the problems they face. Most of the current standard and codes address the issues of developed and emerging market economies.

A charter for natural resource revenues

The British government has worked some way towards one with the Extractive Industries Transparency Initiative (2002).

• Resource field leases should be auctioned off in a transparent way.
• Companies should bear some of the price risk.
• All payments must be transparent (this was the focus of EITI).
• Transparency in public expenditures, with minimum standards.

After an international charter has been developed, peer pressure from NGOs and civil society should be used to make sure governments adopt them. This has been successful in making companies such as De Beers clean up their acts.

A charter for democracy

A free press is the key to maintaining transparency and in particular for the bottom billion, a free television and radio.

A charter for budget transparency

Uganda is an effective model. In the mid-nineties, inky around 20% of money released for primary schools actually reached the schools, so a different approach was tried.

The Ministry of Finance informed the local media of all the money released, and sent a poster to each school setting out what it would be getting. When the accounts were revisited, 90% of the money was getting through to the schools.

Nigeria now publishes budget releases to states every month. Newspaper circulation spikes up on these days. The polity wishes to know where their money is going.

Countries should also engage in peer review, as the countries in the OECD do.

A charter for postconflict situations

A charter for investment