The Bottom Billion

Why the Poorest Countries are Failing and What Can Be Done About It

Focus Take-Aways

Leadership & Management • Countries at the bottom of the development scale have not only failed to grow; they Strategy have actually regressed. Sales & Marketing • They are caught in one or more of four major traps that lock them in poverty. Finance • The traps are: “The Conflict Trap,” “The Natural Resource Trap,” “Landlocked with Human Resources Bad Neighbors” or “Bad Governance in a Small Country.” IT, Production & Logistics • The conflict trap involves a pattern of violence, and civil war or “coup rebellions.” Career Development Small Business • Paradoxically, natural-resource wealth may undermine democracy and institutionalize poverty, making industrial development difficult and provoking rebellion. Economics & Politics Industries • Landlocked countries need good neighbors to get their goods to market. Intercultural Management • Bad governance is a trap; rulers may benefit from graft that impoverishes Concepts & Trends their nations. • Global competition makes it harder for countries at the bottom to rise. Aid may help, but it must be judicious. Change has to come from within. • Military intervention has a role in countries at the bottom, especially in helping to address conflict. • The problems of the bottom billion are global problems, because they result in migration, terrorism and other phenomena of great concern to richer countries.

Rating (10 is best) Overall Applicability Innovation Style

9 6 9 9

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What You Will Learn In this Abstract, you will learn: 1) What four traps lock the poorest countries in poverty; 2) What the international community should and should not do to help free them from those traps; and 3) Why helping the bottom billion is in the self-interest of developed and developing countries.

Recommendation getAbstract ﬁ nds that this concise, clearly written and hard-hitting book by Paul Collier, one of the world’s leading experts on Africa, is a must-read for anyone concerned with development, economic justice, trade, immigration, terrorism and related issues. The author has scant patience with sacred cows of either the right or the left. He penetrates the ﬁ ctions and fantasies that have helped drive not only unproductive but actually counterproductive policies on aid, trade, investment and more. The book is enlightening, and entertaining in the way that good satire is entertaining. It is also inspiring, since Collier goes beyond merely identifying problems: He offers credible suggestions for solutions.

Abstract

The Poorest The world’s poorest countries, a group of 58 nations with roughly a billion people, have “The real challenge of some distinctive things in common. While the rest of the world has been getting richer, development is they have been getting poorer. Their decline is absolute, not merely relative. Some, such that…a group as the Democratic Republic of the Congo, are economically worse off now than in 1960 of countries at or 1970. These countries are caught in one or more of four traps: the “conflict trap,” “the the bottom…are natural resource trap,” the trap of being “landlocked with bad neighbors” and of “bad falling behind, and often governance in a small country.” falling apart.” Some suffer from a conflict trap, including civil wars and “coup rebellions,” that both results from and produces poverty. However, violent conflict is not the only trap to spring shut on these countries. A rich endowment of natural resources can be a trap that makes it difficult for countries to develop. A landlocked country whose neighbors have bad policies and weak infrastructures faces an enormous obstacle to development. Poor governance is also a trap. These traps prevent growth, which poor countries desperately need. The idea that growth is good may still be somewhat controversial, however, it is demonstrably true. Failure to grow is the fundamental, critical problem for the bottom “The problem of billion. Growth rarely benefits only the elites; it usually brings benefits to the population- the bottom billion at-large, but the poorest countries have had no growth. is serious, but it is ﬁ xable. It is Solving the problems of the bottom billion is possible. In fact, a set of policy tools can help much less daunting the poorest help themselves. It is true that change must come from within these societies, than the dramatic problems that yet the international community can make change more or less likely to succeed. were overcome in the 20th century: “The Conflict Trap” disease, fascism, Conflict occurs in every society. However, sustained or repeated violent conflicts can and communism.” lock countries in poverty. This is one of the most dangerous and difficult traps. Take civil war. Conventional wisdom about civil war is often wrong. For example, political grievances and unequal incomes don’t seem to be related, and neither do historical

The Bottom Billion © Copyright 2008 getAbstract 2 of 5 conflicts and the risk of civil war. However, a close relationship does exist between poverty and civil war. Countries with low incomes and slow growth are much likelier to “The story so far: A group of experience civil war. countries with Fighting-age men may find in rebellion a chance, however small, at riches, especially in nearly a billion people living in a resource-rich country. Low income, slow growth and natural resources are the three them have been primary economic factors in the risk of civil war. Once started, civil wars tend to keep caught in one going, and the poorer the country is, the longer its civil war is likely to continue. Civil or another of wars result in refugees, epidemics, poverty and loss of liberties. The murder rate is apt four traps.” to go up, even after the war. Countries that experience civil war are apt to experience it again. Peace tends to be short-lived. Coup d’états also correlate with economic factors, especially low income and slow growth. Such rebellions also often recur. A country that has experienced one coup is likely to have another. However, natural-resource wealth is not correlated with the “While the rest incidence of coup d’état, perhaps because a coup does not require a sustained source of the developing of financing. world has been growing at an unprecedented “The Natural Resource Trap” rate, they have A rich endowment of natural-resource wealth can trap countries in slow growth. Slightly stagnated or less than a third of the bottom billion live in countries whose economies depend on natural even declined.” resources. This turns out to be bad news economically and politically because natural- resource wealth puts countries at risk for so-called “Dutch disease.” The discovery of natural gas in the North Sea strengthened the Dutch currency. As a result, the prices of Holland’s manufactured exports rose. Natural-resource wealth made its manufacturing less competitive. In such countries as Nigeria, something similar occurred. Labor- intensive production might have provided a platform for growth in Nigeria, as it did “But it is very difﬁ cult for them in China and India. However, natural-resource wealth effectively crowded out such to implement production. As a result, the Nigerian economy depended on volatile natural-resource change because prices, and swung through boom-and-bust cycles. they inherit a civil service that…is Natural-resource wealth also makes it difficult for countries to develop healthy hostile to change political cultures. When the state has money to spend without taxing its people, voters because…civil become less vigilant and less vocal. Natural resources expand the opportunities servants proﬁ t for patronage. Various constituencies can get what they want, because the natural from the tangled mass of regulations resources generate plenty of money. The result of this wealth is often a narrowly and expenditures based economy dependent on volatile commodity prices, and an undemocratic or just over which they functionally democratic government. preside.” “The Landlocked with Bad Neighbors Trap” Landlocked countries are handicapped. Their transportation costs tend to be higher because they depend largely on the countries that surround them. Landlocked Switzerland has neighbours –Germany and Italy – with good transportation infrastructures. By comparison, Uganda’s neighbors are Kenya, Sudan, Somalia, Tanzania and the “The resource- rich countries Democratic Republic of the Congo, countries whose transportation infrastructures are are in more need not up to European standards. Neighbors are not just corridors to the sea; they are also of checks and potential markets. Here, too, Uganda is at a disadvantage. Landlocked countries can try balances than the these nine tactics to improve their circumstances: other countries, but paradoxically have 1. Promote reduction of trade barriers both intra- and interregionally. fewer of them.” 2. Urge neighbors to pursue sound policies. 3. Take feasible measures to improve access to the sea.

The Bottom Billion © Copyright 2008 getAbstract 3 of 5 4. Adopt policies that will make the nation a regional haven for businesses. 5. Encourage cost-cutting airlines and e-services. “Africans took their 6. Promote emigration and remittances. money, whether corruptly acquired 7. Encourage exploration and prospecting for resources. or honestly 8. Know that industrialization will come slowly. Prioritize rural development. acquired, out of 9. Adopt policies that encourage donors to provide aid. Africa because the opportunities for “The Bad Governance in a Small Country Trap” investment were so poor.” Good governance can help growth somewhat, but poor governance can utterly wreck an economy. The importance of governance depends to some extent on a nation’s opportunities. Bangladesh is about as corrupt as Chad. Both have low incomes, but Bangladesh has grown more rapidly, because it has few natural resources and a good coastline. Labor-intensive exports have been its route to growth. Chad is landlocked, with oil wells and aid – both of which can bring on the Dutch disease. Because of the “Countries with impact of these traps, poor governance does more damage in Chad than equally bad bad governance governance does in Bangladesh. and policies do sometimes turn Some countries experience the consequences of poor governance, from brain drain themselves around, to looted treasuries, yet they still change for the better. Others remain locked in but too often it is poor governance, in part because elites may benefit from bad policies. For instance, like waiting for Godot.” bureaucrats can profit by taking bribes to cut through red tape. In part, this is because the poorest countries have fewer people with the education and skills to improve their governance. Many of the poorest countries are failing states. Turnarounds are difficult, risky and unlikely, but possible. Because failing states impose costs beyond their borders, supporting turnarounds is good for other countries. “The cost of a single failing state “The sad reality over its entire history of failure, to itself and its neighbors, is around $100 billion.” is that although globalization Marginalized has powered Countries can escape these traps, but globalization has made it more difficult. In the majority 1980, the wage gap between developed countries and the rest of the world was so wide of developing countries toward that industries began to move. Labor-intensive manufacturing in many cases went to prosperity, it is Asia. The economics of agglomeration meant that relocating manufacturing in areas now making things to which other companies had already moved became progressively more economical. harder for these The pioneering companies had, for example, already helped develop a pool of skilled latecomers.” labor and relationships that benefited later companies. Today the wage gap between, for example, China and Africa, is not sufficiently wide to make it highly attractive for companies to move production facilities from China. This is one way that globalization works against the bottom billion, but not the only way. In its global hunt for natural resources, China has proven itself willing to strike deals with bad governments. “A country such as the Democratic Poor countries also suffer capital shortages. Their markets are relatively small and easy Republic of the to ignore, so capital does not flow in; it flows out as the inhabitants send money abroad Congo (formerly for lower risk and higher return. Skilled people can earn more elsewhere, so they leave. Zaire) will need around half a century of peace The Role of Aid at its present rate Aid can be harmful or helpful. Sustained security aid can help break the cycle of civil of growth simply war. Aid really can do nothing for countries caught in the natural resource trap, but to get back to the aid to help landlocked countries reach the sea can be very worthwhile. The right kind income level it had in 1960.” of aid (in the form of incentives, skills and reinforcement) can help countries caught in the governance trap turn themselves around. Notably, aid can stem capital flight by improving the prospects for investment.

The Bottom Billion © Copyright 2008 getAbstract 4 of 5 The Case for Military Intervention Military intervention can be a valuable tool to improve conditions in the poorest countries. Peace is a public good. America was right to go into Somalia and wrong to withdraw. The international community was wrong to ignore Rwanda. The failure of these states had consequences for, among others, the United Kingdom. Somali émigrés were involved in an attempted bombing of the London Underground and a bank robbery that claimed a “The left needs to move on from policewoman’s life. In contrast, British military intervention in Sierra Leone was quite the West’s self- effective, with an estimated benefit to cost ratio of 30 to 1. Effective foreign military ﬂ agellation and intervention can help break the cycle of coups. idealized notions of developing Legislation and Agreements countries. Poverty Changes in legislation and the development of new norms of international economic is not romantic.” conduct can provide low-cost, effective interventions. Rich countries, especially their banks, have aided and abetted criminal exploitation of the bottom billion. Western banks have accepted deposits of dirty money, guaranteed secrecy to corrupt depositors and refused to return funds to their legitimate owners. Former Nigerian dictator Sani Abacha deposited ill-gotten gains in Switzerland and the Swiss were uncooperative when Nigeria’s government attempted to recover what he had looted. Tax codes in developed countries also have subsidized bribery abroad by offering a tax deduction for payments in pursuit of contracts. Some industries, such as construction, are more corrupt than others, but international norms can be even more effective than legislation. For instance, DeBeers has made positive efforts to clean up the diamond industry. Britain’s Extractive Industries Transparency Initiative helped address problems in the resource extraction industry. This initiative is the sort of charter that has begun to gain traction in the developing world. Peer pressure enforces such charters, which are worth considering for the sake of democracy, transparent budgeting, post-conflict activities and investment.

The Trade Policy Lever The Nongovernmental-organization community is regrettably and sometimes damagingly “The right needs ignorant of trade policy. Christian Aid, a British charity, launched a campaign against to move on from free trade, even though free trade is what the bottom billion really need. The trade the notion of aid as part of policies of the Organisation for Economic Co-Operation and Development (OECD) the problem – as often discriminate against the bottom billion; trade barriers do serious damage. So- welfare payments called fair trade aims at raising prices for commodities, such as coffee, produced by the to scroungers bottom billion. Perversely, this creates a disincentive for them to move away from such and crooks.” commodities and into more promising production, such as labor-intensive manufacturing. Regional integration will not solve the problem. Export diversification is necessary, but competition from Asia is extremely difficult. OECD trade policies ought to favor the bottom billion by removing tariffs on their production. The bottom billion countries should not be in the World Trade Organization, which calls for reciprocal reduction, since they lack meaningful bargaining power. They need nonreciprocal reductions in barriers.

About the Author

Paul Collier is professor of Economics and director of the Centre for the Study of African Economies at Oxford University. Formerly director of development research at the World Bank, he also wrote Breaking the Conflict Trap.