Reversing the divergence of the bottom billion

What America did for Europe after 1945, we must now do for Africa

(pages 25-29 of printed journal)

Introduction

The Third World has shrunk, but it has not vanished. The 'New Third World' - the hard core of the economic development challenge - is composed of some 50 countries that are home to a billion people. Most of the bottom billion live in Africa, but others are scattered across the continents - in Haiti and Bolivia in Latin America, Yemen in the Middle East, many of the 'Stans' in Central Asia, and Laos and East Timor in East Asia. This group of small countries has sheered off from the rest of mankind, and as the world becomes more socially integrated, this giant pool of poverty will be both unacceptable and explosive. It is the world's biggest economic problem and we need to do something about it.

Four distinct traps

To know what to do, we need to start with a diagnosis. While the common fate of the bottom billion has been stagnation and poverty, there has been no single cause. I think there are four distinct traps that between them account for the problem, each requiring a distinct remedy.

One trap is paradoxically to be poor but abundant in natural resources. The revenues from these exports usually distort the political system into patronage. Another trap is to be landlocked with bad neighbours. To be small is also to be at the mercy of your neighbours, especially if you are landlocked. Suppose that Australia was not united but each state had remained as a separate small country. Or even more dramatically, suppose that the United States had been the Divided States, with each state sovereign and self-serving. The great manufacturing and agricultural heartland states of America would have been strangled at birth by the absence of interstate highways, railways and canals. Consider the plight of Niger, which is dependent upon Nigeria, and of Uganda, which is dependent upon Kenya. Both are landlocked and located in the Divided States of Africa, and one third of Africa's population live in such countries. A third trap is civil war. Many of the countries of the bottom billion are plagued by civil war because they are not only poor but too small to maintain internal security. Imagine if India or China were divided into 50 countries. Do you think they would all be at peace? The final trap is to start with bad policies and governance and to lack the critical mass of educated people needed for the society to be able to correct errors over a reasonable time scale. These four traps have between them delayed the development of a billion people.

Globalisation is not working for the bottom billion

Will globalisation automatically help these people? Globalisation is propelling China and India toward wealth, and they are closing in on the rich world with unprecedented speed. But globalisation is not working for the bottom billion. Incomes in the bottom billion have been virtually stagnant. For the four decades from 1960 to 2000, the New Third World experienced no growth at all. Meanwhile, the rest of the developing world has enjoyed accelerating growth, decade by decade. At first gradually, then rapidly, the bottom billion have fallen away from the rest of mankind.

To date, globalisation has left the bottom billion behind. During the golden decade of the 1990s, between the end of the Cold War and 9/11, the bottom billion's divergence from the middle four billion people on Earth had accelerated to five per cent a year. By the millennium, the income gap between the average citizens of the bottom billion and those of the middle four billion was five to one. And if you think that income gap is alarming, think about the lucky billion - in Europe, North America, Japan and elsewhere - at the top. One part of the problem is the World Bank and the United Nations, which focus on poverty like a bean-counter. That only confuses the real issue. It is not enough that absolute levels of poverty start to fall in the New Third World. The further that a billion people fall behind the rest of humankind, the more it will present the world of our children with unmanageable pressures. Even as the world's economies are bifurcating, the world continues to draw closer together socially - through information and migration - and the youth in the bottom billion know they are being left behind. To catch up, they will need spectacular increases in growth.

So how can the international community help the bottom billion catch up? In each country of the New Third World, reformers are struggling with entrenched interests and to catch up to the rest of the world they must win these struggles. We cannot do it for them, but we can make their struggle a whole lot easier than it has been to date.

In 1945, the US got serious about rebuilding Europe, with aid through the Marshall Plan. But there was also trade. Washington reversed the protectionism of the 1930s and created the General Agreement on Tariffs and Trade, thereby integrating Europe into the US economy. And there was also security: Washington reversed the isolationism of the 1930s and created NATO, stabilising Europe by placing more than 100,000 US soldiers on European soil for decades. And there was also a shrewd attempt to create systems that produce good governance. Washington created the OECD and encouraged the formation of the EEC, thereby starting the process of mutually setting standards that help lock Greece, Spain and Portugal into democratic market economies, followed by much of Eastern Europe. We, as the fortunate inhabitants of the OECD, are all now 'America', and our equivalent of Europe in 1945 is Africa. What America did for Europe after 1945, we must now do for Africa.

How to get the bottom billion on a more prosperous track

It is feasible to get the bottom billion on a more prosperous track, but it will require a serious approach that utilises all the instruments at our disposal and is sustained for at least two decades. Indeed, we will need the same toolkit as we used in the recovery of postwar Europe - aid, trade, security and good governance - although, of course, utilised differently.

Aid will probably be more or less as important to helping the bottom billion as it was to saving postwar Europe - part of the solution but not decisive. The exclusive reliance upon aid has distorted what should be a focus on institutions and energy devoted to development. Instead of development agencies, we have aid agencies. Instead of pressure from the street for development, we have pressure for aid.

The distortion of institutions and citizen pressure is self-perpetuating because it crowds out consideration of the other approaches. What, for example, do you imagine aid agencies lobby for? Our utter neglect of trade, security and governance policies for the bottom billion is a scandal - and an opportunity. Properly used, these policies have real potency, which is why they were used for the recovery of Europe. Australians who care about world poverty have to learn how to use the full array of policies, rather than pretending that it can all be done by aid.

Saving the bottom billion will also require the OECD countries to work together. The emerging economies will need to do the same. To produce this unity of serious purpose, caring will not be enough: goodness is in limited supply. Fortunately, it can be reinforced by the less morally demanding and, therefore, better supplied motivation of enlightened self-interest. Moved as I am by the miseries of life at the bottom, I too have a self-interested stake here. I am fearful of the world that my seven-year-old son will inherit unless we wake up. A previous generation rose to the challenge of restoring Europe and gave us all a safer world. Our own generation now has its own choice to make: whether to face up to our responsibilities or, like the generation of the 1930s, go into collective denial and sleepwalk into a nightmare.

In our democracies, politicians will ultimately do what we ask of them. It is our collective responsibility to grasp the challenge posed by the bottom billion - and, critically, to get sufficiently up to speed with the issues and to understand what can be done about them. Only then will our politicians move from gestures to serious, effective actions. That is why, although The Bottom Billion is a serious book, I wrote it in a style that makes it easy to read. I tried to do so because I realised that, inadvertently, the same process that has succeeded in getting economic development onto the political agenda - lobbying of rock stars and NGOs - risked trivialising its policy content. It is time for academics to set aside their tendency to write only for each other, and to reach out to their fellow citizens in communicating their expertise. While the style of the book is light, its content is about research, essentially pulling together my recent research with a number of colleagues. This pulling together is also increasingly rare in academic behaviour. Our work is now overwhelmingly presented in article-sized nuggets with few serious outlets for more sustained analysis. Does the book have any ideas beyond those familiar to any academic development economist? Professor Brad de Long's assessment, taken from his blog page says, 'The Bottom Billion is a very exciting and important book. It is rare to read something on economic development that is true, non-trivial, and potentially useful.'

The key policy issues for helping the bottom billion

So what are the key policy issues? One is that while Africa has failed to develop jobs in export manufactures, this same strategy has been transforming Asia. Bangladesh has generated nearly three million jobs by exporting garments. If Kenya could do the same, it would be transformed; but Asia's success has made it harder for Africa to get started. We can help by granting Africa better access to our markets. At present most of the G8 countries impose tariffs on imports of garments from Africa. America is the one exception. This is embarrassing for the rest of us since we pretend that America does not 'care' about Africa. But the US allows Kenya to export shirts duty-free and with generous rules-of-origin into its market, which is not true of either Australia or Europe. Even the few African countries that are allowed duty-free access get blocked by absurd technical requirements: Lesotho sells thousands of shirts to America, but they do not satisfy the regulations of the European Union. As a result, over the last five years, Africa's garments exports to Europe have declined while increasing sevenfold to the US. The G8 could easily adopt a common set of rules for these African exports that would generate jobs across the region.

A second policy issue is that many of the countries of the bottom billion have been benefiting from revenue booms from oil and other minerals that dwarf any conceivable aid flows. The last time this happened was 30 years ago and it proved a disaster. The money corrupted the local politics so badly that not only was it wasted, but it impoverished people, sometimes even leading to civil war. Can the governments of developed countries do anything to reduce the risks of repetition? Australia and Canada could take the lead on this issue since they are the two key resource-rich countries of the OECD. Where do corrupt politicians put their money? They certainly do not leave it in their own banks. It comes to our banks. And what do our banks do? Basically, they keep quiet about it. Is this a necessary consequence of banking secrecy laws? No, it is not. If the money is suspected of having terrorist associations then, very sensibly, we now require the banks to blow the whistle on it. But if it is stolen from the ordinary citizens of the bottom billion, that is just too bad. It cost the reforming government of Nigeria huge legal fees to track down some of the previous president's millions in a Swiss bank, and even when they won their court battle, the Swiss Minister of Justice blocked sending the money back. There is much more that we can do to support the struggle of reformers within the bottom billion to use the present resource bonanza well, but cleaning up our banks would help.

A third policy issue is security. Quite possibly the most effective 'aid' Australia has ever provided are the troops that have secured peace in Timor Leste. Similarly, Britain has provided troops that have secured peace in Sierra Leone. Both countries in effect guarantee the peace through an 'over-the-horizon' commitment - if there is trouble, troops will fly in. Civil wars have been devastating to the bottom billion. The one in Sierra Leone delivered the coup de grace to an economy that had already been wrecked by revenues from diamonds. Across the region there are now several post-conflict situations that need this sort of commitment. To date, nearly half of all post-conflict countries revert to war within a decade, and we should surely be able to make a difference here. Unfortunately, along came the war in Iraq, which closed down serious discussion of security needs. The OECD powers are afraid that sending troops abroad will be unpopular, and the governments of the bottom billion fear that OECD involvement would license pre-emptive invasions.

Trade in shirts, the governance of resource bonanzas, and security commitments are more sophisticated agendas than simply doubling aid. However, I should stress that I do not see them as alternatives to aid - rather they complement it. Think how seriously America responded to the need to rebuild Europe after 1945 - it used the full range of policies. The challenge posed by the divergence of the bottom billion is evidently more difficult than that of rebuilding Europe. It will take that same full panoply of policies, although obviously the content of each policy will be different.

The message of The Bottom Billion

The message of The Bottom Billion is to narrow our focus and broaden our instruments. Narrow our focus to the divergence of the countries now at the bottom of the world economy - a one billion person problem - because our efforts will be spread too thin if we continue to fuss about the entire five billion people in developing countries. Then we must broaden our instruments beyond the exclusive reliance upon aid, to recognise that other policies are likely to matter more. Our aid agencies need to be re-thought as genuine development agencies.

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A condensed version of the Max Corden Lecture delivered at the University of Melbourne on 15 October 2008.

Paul Collier is Professor of Economics at Oxford University and Director of the Centre for the Study of African Economies. His book, The Bottom Billion: Why The Poorest Countries Are Failing and What Can Be Done About It, won the 2008 Arthur Ross Book Award and the 2008 Lionel Gelber Prize. The book, which is the basis of this lecture and published by Oxford University Press in 2007, is now in paperback.