SUSTAINABILITY OF GROWTH IN DEVELOPING COUNTRIES

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1 SUSTAINABILITY OF GROWTH IN DEVELOPING COUNTRIES Teacher: Paul COLLIER, Marin FERRY Academic Year 2016/2017: Spring semester BIOGRAPHICAL INFORMATION: Paul Collier is the Co-Director of the Centre for the Study of African Economies, Oxford University and Professor of Economics and Public Policy at the Blavatnik School of Government. He took a five year Public Service leave, , during which he was Director of the Research Development Department of the World Bank. He is also aprofesseur invité at CERDI, Université d Auverge, and at Paris 1. In 2008 Paul was awarded a CBE for services to scholarship and development. In 2014, Paul received a knighthood for services to promoting research and policy change in Africa. He is the author of The Bottom Billion, which in 2008 won the Lionel Gelber, Arthur Ross and Corine prizes and in May 2009 was the joint winner of the EstorilGlobal Issues Distinguished Book prize. His second and third books were Wars, Guns and Votes: Democracy in Dangerous Places (2009), and The Plundered Planet: Why We Must and How We Can Manage The World s Natural Resources to Ensure Global Prosperity (2010). His fourth book in the trilogy is Exodus: How Migration is Changing Our World (OUP, 2013). Paul is currently Advisor to the Strategy and Policy Department of the IMF, advisor to the Africa Region of the World Bank; and he has advised the British Government on its recent White Paper on economic development policy. He has been writing a monthly column for the Independent, and also writes for the New York Times, the Financial Times, the Wall Street Journal, and the Washington Post. His research covers the causes and consequences of civil war; the effects of aid and the problems of democracy in low-income and natural-resources rich societies. COURSE OUTLINE Part 1: Conditions for the Emergence of Polities that are Centralised and Inclusive Economic development needs polities that are centralized and inclusive. No society starts with such a polity. Starting from anarchy, what determines whether either of these features develops? Core Reading: Acemoglu and Robinson, Why Nations Fail: the Origins of Power, Prosperity and Poverty, Collier, Wars, Guns Votes: Democracy in Dangerous Places,

2 Mind, Society and Behaviour, World Development Report, 2015, World Bank. Collier, The Cultural Foundations of Economic Failure: a Conceptual Toolkit, Journal of Economic Behavior and Organization, Besley and Persson, (advanced, technical), Pillars of Prosperity, The Origins of the Centralized State Violence as an economic strategy; scale economies in violence; arms races; tax systems as responses to arms races; tax systems as incentives for promoting economic growth; contract enforcement as an appropriate public good for a leader specialized in violence; market-supporting public goods. Pinker, The Better Angels of Our Nature, Origins of Inclusive Institutions Elite choice between growth and redistribution; expected duration of power; size of elite; time-consistency and commitment technologies. Pressures for inclusion: taxation and representation; wealth, inequality and revolution; franchise reform as a commitment technology; income and democratization; natural resources and taxation. Temporary and permanent cost reductions in the coordination of protest; mis-sequencing elections, checks and balances; Acemoglu, Johnson, Robinson, The Colonial Origins of Comparative Development, American Economic Review, Acemoglu and Robinson, Why Did the West Extend the Franchise? Quarterly Journal of Economics, Besley and Kudamatsu, Making Autocracy Work, 2008 Collier and Rohner, Democracy, Development and Conflict, Journal of the European Economic Association, Bikhchandani, Hirsheifer and Welch, Learning from the Behaviour of Others: Fads and Information Cascades, Journal of Economic Perspectives, Collier and Vicente, Violence, Bribery and Fraud: the Political Economy of Elections in sub-saharan Africa, Public Choice, Collier and Vicente: Votes and Violence: Economic Journal, Collier and Hoeffler, Do Elections Matter for Economic Performance? Oxford Bulletin of Economics and Statistics,

3 Origins of Shared Identity and Growth-Conducive Narratives Shared identity reduces the costs of power because it shifts compliance from violence to consent; common identity comes from participation in a shared endeavour to produce public goods; the struggle for security generates the identities of us and them ; common identity lowers the cost of enforcing power. Power and identity can become misaligned: empires, post-colonial states; costs of misalignment lack of trust (violence, few public goods); lack of internalization of public service. Solutions: shift power to identities; shift identities to power; substitute for an effective state. Shared identity enhances trust and generosity, making cooperation and redistribution easier. Narratives are how ordinary people understand economic policy choices. Functional narratives depict the economy as a positive sum game, and value savings over current consumption, but these attitudes have to be built by social leadership. Miguel, Tribe or Nation? World Politics, Mind, Society and Behaviour, (WDR 2015) Hjort, Ethnic Divisions and Production in Firms, Quarterly Journal of Economics (forthcoming). Alesina and La Ferrara, Ethnic Diversity and Economic Performance, Journal of Economic Literature, Barr, Trust and Expected Trustworthiness: Experimental Evidence from Zimbabwean Villages, Economic Journal, 2003 Reinikka and Svensson, Working for God, Journal of European Economic Association,2010 Besley and Reynol-Querol, The Legacy of Historical Conflict: Evidence from Africa, 2012 (check Besley s website). Nunn and Wantchekon, The Slave Trade and the Origins of Mistrust in Africa, American Economic Review, 2011 Akerlof and Kranton, Identity Economics, 2011 Part 2: Processes of Economic Growth out of Mass Poverty Economic development exploits scale and specialization. Starting from a small, poor society which has neither, economic opportunities for growth differ depending upon endowments and technology. Scale and specialization require increased connectivity between economic actors and this depends upon efficient urbanization. While urbanization is common to all successful development, geographic differences imply three distinct paths of development. Core Reading: Collier, The Bottom Billion,

4 Besley, Poor Choices, Foreign Affairs, January Lucas, R. Why Doesn t Capital Flow from Rich to Poor Countries? American Economic Review, Caselli and Freyer, The Marginal Product of Capital, Quarterly Journal of Economics, Urbanization No society has developed without urbanization. Urbanization poses a coordination challenge as spatially irreversible investments in infrastructure, housing and business premises are interdependent. The pillars of successful urbanization are high connectivity achieved through density and transport infrastructure. Each of these depends upon policies and does not happen automatically. Collier, African Urbanization: an Analytic Policy Guide, mimeo, Growth in Small, Isolated, Pre-Industrial States Modern production depends upon scale economies, specialization and inter-dependence of products, and transport costs. Implications: no necessary comparative advantage; no necessary full employment Growth as the accumulation of activities; role of pioneering; information costs of pioneering; externalities of pioneering Growth through demand expansion; growth through subsidies on pioneering; growth through falling transport costs Collier, Haiti: from Natural Catastrophe to Economic Security, a Report for the Secretary General of the UN, Collier, Aid as a Catalyst for Pioneer Investment, WIDER WP2013/004, Crisafulli and Redmond, Rwanda Inc, Growth in Small, Integrated Pre-Industrial States Characteristics of modern global manufacturing: trade-in-tasks, cluster scale economies; threshold effects; explosive growth UNIDO Industrial Development Report, Breaking in and Moving On,

5 Growth in Small Resource-Rich States Natural resource extraction as a free-standing activity; the decision chain in growth through resource extraction: discovery; taxation; the local environment; consumption and savings; the investment process; the political economy of decisions. Collier, The Plundered Planet, 2010, or the Introduction to Collier and Venables, Plundered Nations? Collier and Hoeffler, Testing the NeoCon Agenda, European Economic Review, 2009 Collier, The Institutional and Psychological Foundations of Natural Resource Policies, Journal of Development Studies, Part 3: External Influences (Depending on the pace of the course, we may not cover any or all of this section) The political and economic processes discussed in previous sections are fundamentally internal. External influences are peripheral but may still matter, for good or ill. To the extent that they have effects they generally work by altering one or other of the internal processes. Core Reading: The Bottom Billion, (Part IV) Aid Aid as a transfer of money has an obvious analogue with natural resource revenue, and so has both positive and negative effects. It differs from resource revenue in being allocated purposively. The conditions determining its allocation themselves have effects, which can be both good and adverse. China s approach of proposing deals that provide mutual benefit is an important departure from conventional aid. Collier, Is Aid Oil? World Development, 2006 Collier, How to Spend it, WIDER Working Paper, 2011 Brautigam, The Dragon s Gift Easterly, White Man s Burden Collier and Dollar, Aid Allocation and Poverty Reduction, European Economic Review,

6 Trade Developed countries set rules of trade policy which shape the opportunities for developing countries to export. By giving differential preferences to the countries yet to break into the global market for manufactures they can pump-prime the formation of clusters. Collier and Venables, Rethinking Trade Preferences: How Africa Can Diversify its Exports, The World Economy, 2007 Migration Core Ideas: Migration from poor countries to rich ones drains them of talented and skilled people, but produces three offsetting positive effects. It increases the incentive to get an education; it generates a flow of remittances, and it speeds the flow of ideas on political, social and economic organization to poor societies, potentially accelerating change. The pertinent issue is not whether migration is good or bad overall, but whether more of it would have a positive or negative net effect on poor countries. Collier, Exodus: Migration and Multiculturalism in the 21 st Century, Docquier and Rapport, Journal of Economic Literature, Military Intervention Core Ideas: External military intervention has been used for various objectives: to restore peace, as the British intervention in Sierra Leone, to secure a post-conflict settlement, as in numerous UN peacekeeping situations, and to change regime, as in Iraq and Afghanistan. It has broadly succeeded in securing peace, and failed when used to change regimes. Collier, Wars, Guns and Votes Collier, Hoeffler and Soderbom, 2008, Post-Conflict Risks, Journal of Peace Research International Rules and Guidelines for Governance Core Ideas: The international community has built many rules and guidelines, but most have been used mainly by OECD countries for themselves: e.g. the Basel standards for banking, and the WTO for trade. The system is now being used to build rules and standards appropriate for poor countries: e.g. the International Court of Justice, international monitoring of elections, the Extractive Industries Transparency Initiative and the Natural Resource Charter

7 Collier, Standards and Codes for the Resource Curse, Yale Journal of Law and Human Rights, Collier and Venables, Land Deals in Africa: pioneers and speculators, Globalization and Development, Collier, Building an African Infrastructure, Finance and Development, Collier, Taxation, Prospect, 2013 (freely downloadable from the Prospect website)