The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. Paul Collier.NY: Oxford University Press, 2007.
By Marissa Thrall, MBA Graduate Student
"Poverty is something that most people are managing to escape" (p. x). After studying poverty and its impact in the world, Collier redefines the common terminology surrounding poverty. Whereas before there was simply the developed world (consisting of around 1 billion people) and the developing world (consisting of the remaining 5 billion people), there is now the developed world (same 1 billion people), the developing world (down to around 4 billion people) and the bottom billion. This last category is marked not by simply being the poorest, but by actually failing to grow. The countries he considers part of the bottom billion include: Africa, Haiti, Bolivia, the Central Asian countries, Laos, Cambodia, Yemen, Burma, and North Korea. "The real challenge of development is that there is a group of countries at the bottom that are falling behind, and often falling apart" (p. 3).
Many development economists suggest that countries like the above fall into a poverty trap, from which they cannot get out without help from the outside. Collier refutes this argument and claims that rather than a poverty trap, there are four distinct traps that each contribute to the poverty and lack of development in the bottom billion. In order to address the bottom billion, it is necessary to understand the four traps, the role of globalization in modern development and the instruments that can help a country escape from the traps. The analysis in the book comes directly from research performed by Collier and many of his colleagues. Collier recognizes that the change is going to have to come from within the societies of the bottom billion, and change cannot occur through Western coercion. But that does not mean that there is no role for the West in assisting in the development of the bottom billion. In fact, according to Collier, "[i]f nothing is done about it, this group will gradually diverge from the rest of the world economy over the next couple of decades, forming a ghetto of misery and discontent" (p. xi).
The Traps
1. The Conflict Trap
Collier analyzes two types of conflict: civil war and coups. Seventy-three percent of people in the bottom billion have recently been through a civil war or are currently in one (p. 17). As civil war is so common among the bottom billion, Collier analyzed the impact of civil war on a country and the effect it has on growth. He begins by analyzing causes of civil war and determines that civil war is more likely to break out in low-income countries. If you halve the starting income of the country, you double the risk of civil war. Indeed, there is a reciprocal relationship there, in that while low-income heightens the risk of civil war, the war itself reduces income. Collier discovered that low income simply means poverty, but in poverty there is a hope of improvement. Low growth, on the other hand, brings hopelessness, which creates a breeding ground for recruits for civil wars. Furthermore, if the economy is weak, the state is likely to be weak, making rebellion less difficult. Countries whose economy is highly dependent upon primary commodity exports have substantially higher risk of civil war as the public sector is likely to have excessive amounts of money. In fact, donations from outside communities, whether through foreign aid or personal contributions are one of the key sources of financing for rebel movements. Surprisingly, Collier found no relationship between civil war and political repression, ethnic discrimination, income inequality or a history of colonization. While ethnic discrimination did not seem to increase the risk of civil war, societies with a large ethnic majority in the presence of other ethnicities are at more risk.
Collier then tackled the questions of why civil wars last so long and how much they cost a country. He concluded that the lower the income at the onset of the conflict increases the length of the civil war. In addition, if export products increase in value, more money becomes available to finance the wars, thus increasing the length. Countries that have experienced a civil war have double the risk of another conflict, with poor countries having disproportionately higher risk of relapse. Civil wars have significant financial and social costs. Civil was reduces growth by 2.3% each year. With civil wars averaging 7 years in the bottom billion, that amounts to a total decrease of 15% in economic growth. In addition to the decreased growth, the war itself costs approximately $64 billion dollars over the course of the conflict. The costs spread much farther than finances, however, including deaths, refugees, mass movements of people. The environment of violence typically continues after the end of the fighting. Additionally, the neighboring countries incur costs such as diseases, economic stress and an influx of refugees.
What makes conflict a trap? The risk that a bottom billion country has a civil war in any 5-year period is 1 in 6! Once a conflict has begun, economic damage undoes growth achieved during peace periods. With the experience of conflict increasing your likelihood of another, this damage can severely impede sustained growth. Also, the end of political fighting usually ushers in a boom of homicides and other violent crimes.
The other form of conflict is a coup. Coups occur under very similar circumstances as civil war. The two biggest risk factors are similarly low income and low growth. Ethnic dominance does increase risk in coups more than in civil wars. The main difference between coups and civil wars is that natural resources do not matter. Unfortunately, the political instability coups manifest is detrimental to economic development and is a harmful way of changing a government.
2. The Natural Resource Trap
The second trap investigated by Collier was the natural resource trap. At first, the presence or discovery of a natural resource would seem like an extremely beneficial tool for growth and expansion, but in the context of poverty, it is rarely a catalyst into prosperity. Twenty-nine percent of the bottom billion governments have resource wealth as the main contributor to the economy. The surplus from natural resource exports actually reduces growth significantly. The first explanation economists named "Dutch disease." The resource exports cause the currency to rise in value against other currencies, making the country's other export activities uncompetitive. Then, when the resource surpluses decrease, the government budget gets cut. What is typically removed from the budget, however, is not the frivolous items that were increased during the boom, but whatever is most politically vulnerable, usually basic investment and public goods. Natural resources affect politics in more ways than just the budget. Collier states, "the heart of the resource curse is that resource rents make democracy malfunction" (p. 42). This occurs because taxes become less important with the large amounts of money gained from the resource. Lack of reliance on taxes creates a disincentive for the citizens to hold the government accountable for the budget and expenditures.
In fact, Collier discovered a trend that in countries without natural resource surpluses, democracies outgrow autocracies, but with them, autocracies outperform democracies. This is due to how resource surpluses induce an excessively large public sector – the exact opposite of a minimal state required of democracies. Also resource-rich democracies tend to under-invest or invest badly. Resource rents undermine how power is achieved and how it is used and they erode checks and balances. Resource-rich countries that are more ethnically diverse and inhibit free press perform worse. In fact, the only time autocracy worked well for the economy is in societies that are not ethnically diverse. Collier concludes, "the resource-rich, ethnically diverse societies need a democracy that is distinctive in having a strong emphasis on political restraints relative to electoral competition" (p. 50).
3. The Landlocked with Bad Neighbors Trap
Collier discusses the importance of geographic location and its impact on the economy. Currently, 30% of the bottom billion countries are resource-scarce, landlocked countries in bad neighborhoods. If the country is resource-rich, that becomes the defining feature of the country, rather than being landlocked because the high cost of resources can sustain the higher transport costs of a landlocked country. Transportation costs depend mostly upon the amount the coastal neighbors have spent on their own transportation infrastructure. Unfortunately, most African countries' economies are either inward looking or geared toward the world market. Globally, the growth spillover effect is 0.4% increase for every 1% increase of the neighbor. For Africa's coastal countries, this rate increases to 0.7%, but the landlocked countries falls to 0.2%. When it comes down to it, "other than in Africa, areas that are far from the coast and don't have resources simply don't become countries" (p. 57).
Collier then presents nine strategies of how to get out of the trap: 1) Increase neighborhood growth spillovers through better transport infrastructure and regional trade policy, 2) Improve neighbors' economic policies through supporting better policies, 3) Improve coastal access, 4) Become a haven for the region – set policies better than surrounding region, 5) Don't be air-locked or E-locked – deregulation of transportation industry and improve infrastructure, 6) Encourage remittances, 7) Create a transparent and investor-friendly environment for resource prospecting, 8) Rural development, and 9) Attract aid. Even some of the strategies to improve the economy of a landlocked, resource-scarce country involve regional cooperation and good international relations.
4. The Bad Governance Trap
The fourth trap is the bad governance in a small country trap. 76% of the bottom billion nations have been through a prolonged period of bad governance and poor economic policies. Overall there is an asymmetry in the effect of governing well and making good economic policy decisions and in doing them wrong. There is a ceiling to growth rates from good economic policy of about 10% while terrible governance can literally destroy the entire economy very rapidly, as occurred in Zimbabwe. Unfortunately, many times governments can get away with bad governance as long as external shocks (i.e. export prices) are sufficiently favorable.
Economic reform is not just a matter of political will; it is a technical problem. Many countries with bad governance experience a chronic shortage of people with the requisite knowledge required to complete a successful economic reform due to brain drain or simply poor educational systems. When there are educated people supporting reform, they are often suppressed quickly, making turnarounds of failing states very rare. Collier revealed the preconditions necessary for a successful turnaround. A first, a larger population with a larger proportion with secondary education creates a critical mass of education people, therefore improving the likelihood of success. Second, the recent emergence from a civil war produces an environment that makes change easier. Overall, however, the probability of a sustained turnaround is only 1.6%, and the average length it takes to get out of a failing state is 59 years with the cost of a single failing state of its entire history of failure is around $100 billion.
Globalization: Missing the Boat
All of the bottom billion countries fall into one or more of the four traps. Fortunately, these traps are escapable, and history has shown that countries do emerge victorious despite a history of one or more of the traps. The largest difference between historical breakouts and modern breakouts is globalization. Collier discusses three aspects of globalization and its impact on the new escapees: trade, capital flows, and migration.
International trade is not a new phenomenon in the global economy, however, the extent of that trade and the means of achieving trade are very different. Manufacturers and services now offer much better prospects of equitable and rapid development because they use labor rather than land. Since the bottom billion has an excess of unproductive labor, the prospect of growth is much greater and broad. Unfortunately, trade restrictions inhibit access to the labor in the bottom billion. Asian countries were able to emerge from the traps and enter the arena of global trade early. Their advantage over the newer escapees lies in "economies of agglomeration," or a critical mass of companies in one place that lowers to cost of production and transportation for everyone. In this way, the bottom billion has missed the boat of globalization, and in order to break into global markets, companies must get over a threshold of cost-competitiveness. Collier even suggests that until Asia creates a wage gap significant enough to have Africa and the bottom billion back in the position of low-cost labor and production, Asia will continue to win out over the bottom billion. In a sense, Africa has missed the boat of globalization.
Capital flows and migration also affect the bottom billion in terms of growth and development. Africa has twice as much public capital as private capital, largely due to resource surpluses and foreign aid. The only substantial private investment to the bottom billion has been to finance the extraction of natural resources. Africa currently has an extremely high perceived risk that will unfortunately remain high even after political and economic situations improve. The greatest issue with capital flows is capital flight, specifically private domestic capital. By 1990, 38% of the private wealth in Africa was held abroad. Migration largely affects the bottom billion because of human educational flight, which has become much easier with globalization. Overall, when a country in the bottom billion breaks free of the traps, the global economy makes it much harder to follow the paths of the successful majority.
The Instruments
1. Aid
Aid has had both positive and negative effects on economies in the bottom billion. Over the last 30 years, aid has increased annual growth by approximately 1%. But aid, like other goods, has diminishing returns, which Collier determined was when aid reaches 16% of GDP, it ceases to be effective. Recently, economics have argued in favor of aid as "budget support." Unfortunately, the governments do not spend wisely, and the budget support only exacerbates the existing problems. Likewise, debt relief acts as budgetary support. Collier concludes that overall, the projects, procedures and conditions required by aid have been beneficial. Unfortunately, some aid does leak to military spending, estimated at 11%, and overall 40% of Africa's military spending is inadvertently financed by aid.
In general, middle-income countries receive more aid than the bottom billion. This is due to a tendency to support more politically stable countries. In terms of the traps, aid has no direct effect on the risk of having a civil war, but has indirect effects on financing civil war. Aid does not effect the natural resource trap, but it is vital for the landlocked countries. Collier argues that the resource-scarce, landlocked country "basically need to be on international welfare for a long time" (p. 107). The way aid is used may or may not impact bad governance. Aid used as an incentive for change can cause resistance, governments may evade responsibility and external pressure is needed. Aid used to supply skilled people is especially important directly after a conflict, but should not be sustained for a long period of time and should be replaced by financial aid. Aid used as reinforcement, early in the reform process is actually counterproductive to the reforms being made. Aid prior to reform, when a country is operating in a failing state, should account for higher administrative costs due to larger amounts of monitoring. Aid can have the effect of Dutch disease as well, and therefore should be directed to the export sector and infrastructure. Aid also reduces capital flight. "Aid does have serious problems, and more especially serious limitations. Alone it will not be sufficient to turn the societies of the bottom billion around. But it is part of the solution rather than part of the problem. The challenge is to complement it with other actions" (p. 123).
2. Military Interventions
Military intervention is extremely controversial, especially given the current situation in Iraq. Failed military interventions, like Vietnam, or Somalia, send the message that we should never intervene. This lesson led to the disregard of situations like the Rwandan genocide. There are three roles of military intervention, in which external military presence are often necessary and can significantly assist countries: restoration of order, maintaining postconflict peace, and protecting against coups.
3. Laws and Charters
Collier suggests that military interventions are costly in money and human resources. A cheaper way to assist the bottom billion is in the modification of our own laws and in the generation of international charters to guide the behavior of the bottom billion. We could alter our own laws to provide harsher punishments for banks that take deposits looted from the bottom billion. Western nations could also make bribery of a foreign official an offense, and attempt to enforce this law with severe punishments. The largest industries that partake in bribery on a massive scale are extraction and construction. Stricter legislation involving these industries may help alleviate corruption.
Collier then suggests five international charters regarding: natural resources, democracy, budget transparency, postconflict situations and investment. In term of natural resources, the international community should introduce the auction into contractual relationships. Companies who are extracting resources should also incur some of the risk of infrastructure building. Also, a greater importance of transparency in public expenditures and payments of revenues would help decrease the corruption. Democratic charters would encourage electoral competition, as well as introducing greater checks and balance, and promoting the freedom of media, specifically the radio. Budget transparency is obvious, and should be expected from all countries. Postconflict situations require aid for an entire decade, and should require reduced military spending, transparent budgetary processes and individual property rights. Lastly, changes in investment should include policy reform to make the environment less risky.
4. Trade Policy
Part of the concern with trade policies is that rich countries simultaneously give aid to developing countries and implement trade policies (subsidies & tariffs) that hinder the growth of those countries. "It is stupid to provide aid with the objective of promoting development and then adopt trade policies that impede that objective" (p. 160). Interestingly enough, the trade policies of the bottom billion also negatively affect growth. Bottom billion countries typically adopt high trade barriers because they are one of the key sources of corruption. Aid itself can increase poverty if it is not accompanied by liberalization of trade policies.
Collier suggests several answers to the question of improving trade: fair trade, regional integration, export diversification, protection from Asia, and the role of the bottom billion in the WTO. There are many supporters of fair trade, but fair trade obstructs the path to diversification. Therefore fair trade will not truly improve the long-term situation of the poor. Some economists have suggested regional integration, following the European Union. However, in the case of Africa, "if you combine a number of poor, slow-growing individual economies, you have a poor, slow-growing regional economy" (p. 164). There are some positive changes that can be made to improve trade and growth. Export diversification is extremely important because domestic markets are often too small to support competition, and the education from exporting and competing with other firms is highly valuable in increasing productivity. With the current situation of "economies of agglomeration" in Asia, Collier suggests temporary protection from Asia. Therefore, the bottom billion would pay lower tariffs than the goods from Asia. While this would be difficult to sell to the world, without it the bottom billion will stay at a disadvantage until Asia reaches the levels of the developed world. His solution is to completely remove tariffs against the bottom billion where there are currently tariffs against Asia, therefore creating a more level playing field. Lastly, Collier addressed the role of the bottom billion in the World Trade Organization (WTO). As long as the WTO continues to operate as a marketplace for bargaining where the developed countries operate with greater bargaining power, the least developed countries should not even be involved. He argues, rather, that the WTO should give an unreciprocated reduction in trade barriers against the poorest countries. Without this change, the poorest countries will gain little in bargaining with the largest countries through the WTO.
Conclusion
The bottom billion countries are not those simply characterized by poverty, but by their entanglement in one of the four traps that prevent an economy from growth. "Growth is not a cure-all, but the lack of growth is a kill-all" (p. 190). The key to understanding development is that these traps are not inescapable. Even when countries do break free of the traps, the current globalization prevents the bottom billion from competing with Asia in particular. There are instruments to assist in the development of and freedom from the traps of the bottom billion. Depending on the trap and the country's culture and history, the solution will be different. We must understand that development has changed from 40 years ago, and the focus of development should be on the bottom billion that are stuck in one or more of the traps and face the challenges of globalization when they finally emerge. We must also understand that the struggle in the bottom billion for reform is a dangerous contest between moral extremes, unlike our politically governed protests. And lastly, we need not be bystanders. "We will need not just a more intelligent approach to aid but complementary actions using instruments that have not conventionally been part of the development armory: trade policies, security strategies, changes in our laws, and new international charters. In short, we need to narrow the target and broaden the instruments" (p. 192).