Global policies for the bottom billion Paul Collier
Global policies for the bottom billion Paul Collier progressive governance London 2008 Paul Collier is professor of economics at Oxford University and director of the Centre for the Study of African Economies. He is author of The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, which won the 2008 Lionel Gelber Prize. April 2008 Paul Collier Global policies for the bottom billion www.policy-network.net
progressive governance London 2008 Global policies for the bottom billion introduction Since the 1960s, some 50 to 60 low-income countries with around one billion people have missed out on an unprecedented phase of global growth, and in consequence have diverged from the rest of mankind. 1 Not only is there a yawning gulf between this bottom billion and the fortunate billion living in developed countries, but the gap between them and the average citizen from the middle four billion has widened to one-to-five. Reversing the divergence of the bottom billion is the critical challenge of our time: as the world integrates socially, continued economic divergence will generate unmanageable pressures. Assisting these countries to catch up will take a prolonged effort by many countries. This is another important respect in which the world has changed: just as the third world has shrunk from five billion to one billion, so the group of countries in a position to help has expanded. When the key development challenge was the recovery of Europe and Japan after the second world war, virtually the only country in a position to help was America. As Europe and Japan recovered, the burden of assistance broadened to include the OECD, and the development challenge came to be seen as how the rich billion could help the other five billion people on the planet. It is time to move on from this way of framing the problem. The burden of assistance should now be recognised to include many middle-income countries, and the rapidly developing giant economies of India and China. These countries have experience, resources and legitimacy which can massively increase the potency of development efforts. Broadening the range of policies Development is evidently first and foremost something that societies and their governments must do for themselves. In all the societies of the bottom billion there are struggles for change. The role of the international community is nevertheless While aid is in general useful, it is neither necessary nor important. By assisting development we can sufficient for development reinforce these internal processes and we can enhance the opportunities for prosperity. There is indeed much more that the international community can do than it has done to date. In recent years, assisting development has largely shrunk to development assistance the conventional euphemism for aid. While aid is in general useful, it is neither necessary nor sufficient for development. Other policy instruments are often more potent and in any case are complementary to aid.. See Collier (007). The full range of policies that are important for assisting development is revealed by the American effort to reconstruct Europe after the second world war: this was the one time when assisting development was treated as a vital priority. As part of its serious response, America of course had an aid programme: Marshall Aid. However, this was complemented by three other policies. First, America completely reversed its trade policy: pre-war protectionism was replaced by an opening of markets and institutionalised in the founding of the GATT. Second, America completely reversed its security policy: pre-war isolationism was replaced by a large military commitment to Europe sustained over www.policy-network.net Global policies for the bottom billion Paul Collier April 2008
four decades. Third, America also revised its approach to national sovereignty: pre-war refusal to concern itself with international governance, exemplified by the refusal to join the League of Nations, was replaced by founding the United Nations, the OECD and the IMF, and encouraging the European Community. Trade, security and governance remain the key policies that are needed to complement aid, although they obviously need to be tailored differently for the task of reversing the divergence of the bottom billion than for the task of rebuilding Europe. In this paper I set out some specific proposals for each type of policy. international support for governance of the resource booms The current global commodity boom is generating an enormous transfer of income to many, but not all, of the societies of the bottom billion. This transfer dwarfs aid and any conceivable changes in aid. However, the previous resource boom of the 1970s was generally not well-managed: most of these societies ended with little to show from it. progressive governance London 2008 This casual impression is supported by recent research. Collier and Goderis (2007) analyse the relationship between commodity prices and the subsequent growth of commodity exports on global data for the period 1963 to 2003. We find that in the first few years following an increase in export prices economies grow significantly faster, but after around 20 years most economies are worse off than if the export price had not increased. We find that whereas the early phase of growth is universal, the subsequent phase of decline is conditional upon economic governance. Above a threshold of governance the long run consequences are benign: Norway and Australia illustrate such experience. The experience of countries below the threshold is illustrated by Nigeria and the Democratic Republic of the Congo. The threshold is around the level of Portugal in the mid-1980s. Hence, a key issue is how governance standards in the resource-exporting low-income countries can be brought above this threshold as rapidly as possible. Were history to repeat itself, this would constitute the most important missed opportunity for transformative development that the bottom billion have ever had. Key decisions for harnessing resource exports However, economic governance is a vague term which of itself provides little guidance to the appropriate management of the resource booms. There are three key steps which determine whether commodity exports are harnessed for sustained growth. 2 First, an appropriate share of the export revenues must be captured by the government. Second, an appropriate share of these revenues should be saved rather than consumed.third, an appropriate share of these savings should be invested by the government in the economy. More specifically, the capture of revenue depends upon how extraction rights are sold and how corporate revenues are taxed. Both of these have been subject to major errors.. See Collier (008) for a simple elaboration of these decisions. a more advanced paper by Collier, Venables (chief economist, DFiD), and Spence (Nobel laureate in economics) is under preparation. April 2008 Paul Collier Global policies for the bottom billion www.policy-network.net
progressive governance London 2008 In selling rights to resource extraction governments face three problems. There is considerable scope for corruption; there is an asymmetry of information between the government and corporations; and there is often irreducible uncertainty as to the long-term security of any rights. Probably the best way around these problems is to sell rights through internationally verified auctions, with most of the revenue being captured by future taxation rather than by the initial price of the rights. To date there have been huge variations in the taxation of corporate revenues. In 2006 the Democratic Republic of Congo received royalty payments from resource extraction of a mere $86,000 on exports of several hundred million dollars. Zambia has received only a negligible share of the current copper boom. Since the essence of resource taxation is that it is a tax on rents rather than profits, a simple principle is that the rate of royalty payments should rise more than proportionately with the world price of the commodity. The appropriate rate of saving out of resource revenues depends primarily upon the rate of depletion of the asset and the world price of the commodity. Hence, while it should vary according to each situation the variation should broadly reflect these differences. Currently, differences in savings rates are more likely to reflect short-term political considerations. When Ngozi Nkonjo-Iweala became finance minister of Nigeria in 2003, she found that the savings rate out of oil revenues was negative. Some low-income governments are attracted by the Norwegian model of a sovereign wealth fund held in financial assets. However, in contrast to Norway, these economies are chronically short of public investment and so much of the savings should be invested domestically as long as it is done effectively. Effective investment requires both defences against corruption, and the use of economic information in approval processes for projects. Supporting sound decisions In the booms of the 1970s the above decisions generally went wrong. How can the international community support the struggles for improved governance of the resource booms in the societies of the bottom billion without intruding upon sovereignty? The past approach of policy conditionality was in my view misguided. By attempting to coerce governments to adopt specific policies through donor pressure it confused lines of accountability. Manifestly, governments should be accountable to their own citizens and this is incompatible with accountability to donors. Furthermore, policy conditionality would be impotent: the resource exporting countries do not need large aid inflows and so donors do not have leverage. There is, however, scope for providing voluntary guidance by means of international standards and codes. The British government has already pioneered this through the Extractive Industries Transparency Initiative (EITI) which has rapidly become successful. A voluntary code works by providing a focus and a neutral rallying point for reformers who might otherwise dissipate their efforts in rivalries and in issues that are not critical. It provides helpful information to governments which are typically buffeted by many competing pressures as to what specific www.policy-network.net Global policies for the bottom billion Paul Collier April 2008
decisions are vital. The EITI was promptly adopted by Nigerian reformers and became the Nigerian EITI. While the EITI was the right place to start, however, it is the wrong place to stop: transparency of reporting alone is not sufficient to ensure that decisions are sound. Harnessing the resource booms for development is by far the most important single issue facing the economies of the bottom billion at present. International voluntary standards and codes on the key decision-points would be a logical extension of the British initiative on EITI. It would be well-received. In Africa, five governments and the African Development Bank have already indicated strong interest, as has the World Bank and several international NGOs. international support for enhanced security Post-conflict situations Britain was instrumental in the establishment of the Peace-Building Commission and this provides an important opportunity to improve on the record of post-conflict fragility. Following the recent wave of peace settlements there are many such situations. progressive governance London 2008 I have recently analysed 66 post-conflict situations to find what can bring down the risk of reversion to violence (Collier, Hoeffler & Soderbom 2008). I can find no risk-reducing political design: democracy and elections appear to increase rather than reduce dangers. Risks can be reduced substantially through economic recovery, achieved through large aid inflows and active reform of economic policies, but the relevant time horizon is around a decade. In the meantime, many of these societies are at risk and the only effective way of bringing these risks down is peacekeeping, which we find is highly cost-effective. 3 In contrast, large military spending by the post-conflict government appears to provoke reversion to war. Hence, there is a triple interdependence: prolonged peacekeeping provided by the UN security council; prolonged aid provided by donors; and sustained economic reform and inclusive policies on the part of the post-conflict government. Each needs the other: without peacekeeping economic recovery is more difficult and the government will be tempted to rely upon its own army; without economic recovery there is no genuine exit strategy for peacekeepers; without reform and inclusive governance international efforts are likely to be frustrated. The Peace-Building Commission could usefully frame expectations of all three parties, reflecting these mutual obligations in a non-binding global compact, the approach which was pioneered at a more general level at Monterey. Strengthening democratic elections through security guarantees The disaster in Kenya challenges the international community to introduce approaches to strengthening the conduct of elections which are effective yet acceptable. Quite clearly, donor threats and sanctions are unlikely to be effective responses and would also unreasonably discriminate: for example, the government of Kenya has at least held elections whereas several others have not.. The evolution of peacekeeping into an over-the-horizon guarantee, as done recently by Britain in Sierra leone, and over a long period by France looks to be a cost-effective and non-intrusive means of sustaining security. The informal French guarantee, which covered Francophone africa for many years, appears to have brought down the risks of large scale violence by around three-quarters (Collier, Hoeffler & rohner 008). April 2008 Paul Collier Global policies for the bottom billion www.policy-network.net
progressive governance London 2008 In order to be effective, a first step is to establish a solid basis for applying different standards to different countries. The only such basis is if governments voluntarily commit to democratic standards. Thus, a core of established democracies, including India, could propose a voluntary charter setting out minimum standards of elections, linked to existing procedures for election monitoring. A possible incentive for governments to commit to such a charter would be if the founder signatories thereby committed themselves to use their best efforts to protect member governments from the threat of a military coup. In Africa, coups have been endemic and constitute by far the greatest threat of loss of power to most governments. Furthermore, democracy has not significantly reduced the risk. 4 Had such a charter existed in 2002 it seems likely that President Kibaki would have signed it even prior to his victory. During the 2002 election campaign he would have found such a commitment a useful strategy. Such a commitment would have radically changed the incentives facing President Kibaki during the 2007 elections. Naturally, in the event of election monitors declaring that the elections were in serious breach of commitments, the protection against a coup would be promptly withdrawn (the international community would not wish to find itself in the embarrassing position of militarily reinstating a government that had been judged to have stolen an election). But since this would sharply increase the risk of a coup, President Kibaki would have sought to avoid breaching his commitments. 5 A voluntary charter would not in itself intrude upon sovereignty: governments could simply choose not to sign it and there should be no pressure, financial or otherwise, for governments to make the commitment. The provision of a defence against the threat of a coup for democratic governments is appropriate and indeed simply codifies a desirable use of security guarantees. By making a commitment explicit, as Britain already does in Sierra Leone, unwarranted coups are likely to be sharply reduced. Yet it would considerably increase the incentives on incumbents to conduct elections to satisfactory standards. Trade policy for the bottom billion The Doha Round has been badly stalled for a long time, its prospects are dim, and the chimera of a breakthrough should not be allowed to interfere with simple steps that would open opportunities for the bottom billion. Africa and some other low-income economies have to date failed to break into global markets for labour-intensive manufactures. Yet, as demonstrated by the growth of China, this is the surest route to the rapid creation of jobs. Africa in particular faces a jobs crisis. Less than a tenth of its labour force. Collier and Hoeffler (007) analyse several hundred coups and find that while economic development makes a country safer, democracy does not reduce the risk.. The threat of a coup is reputedly why the president of Senegal accepted electoral defeat in 000; one of the very rare instances of such an outcome in africa. is in formal employment, its population is growing rapidly, and its agriculture, which even to date has experienced falling productivity, will become dangerously stressed by climate change. Potentially, the coastal cities of Africa could become platforms for manufactured exports, well-located for European and American markets, with export firms moving into these locations as wages in Asia continue to rise. The difficulty facing Africa, and other economies that missed the boat of early www.policy-network.net Global policies for the bottom billion Paul Collier April 2008
manufacturing globalisation, is that China is already established with large clusters of exporting firms. These clusters drive costs down: for example, 60% of the world s buttons are made in one Chinese city. Countries lacking such clusters cannot break into the market even if their policy environment and infrastructure are reasonable; no firm wishes to be the first to relocate. OECD trade policy can provide the pump-priming that would get clusters started. In effect, such countries need temporary privileged access to OECD markets. The pertinent range of goods is limited to light manufactures where OECD tariffs are still significant: by far the most important is garments. The US is already providing such privileged access through the Africa Growth and Opportunities Act (AGOA). Europe also has a scheme, EBA, but this has been ineffective due to its considerably more restrictive rules of origin and its exclusion of countries such as Kenya and Ghana, which are precisely those best placed to break into international markets. AGOA has been highly successful in stimulating African garments exports, increasing them seven-fold in five years (Collier & Venables 2007). Over the same period the European scheme has had no impact. Canada has a further scheme as does Japan. progressive governance London 2008 What is needed is a common, OECD-wide scheme, broadly modelled on the successful features of AGOA. A common scheme should be more acceptable to the WTO than the present plethora of different schemes, and like AGOA it could have a sunset clause. It is important to limit the beneficiaries to those countries that do not yet have significant manufactured exports, since if countries that already have export clusters are included they will out-compete new entrants and so reap all the benefits. The criterion of not currently having significant manufactured exports provides a pertinent redefinition of Least Developed Country (LDC) which the WTO could use to determine eligibility; the present definition of LDC is outmoded and not well-focused on the countries that need temporary privileged market access. What is needed is a common, OECD-wide scheme, broadly modelled on the successful features of AGOA Such a trade concession would appropriately complement the commodity booms. The countries best placed to benefit are those which are not exporting valuable commodities and so not experiencing Dutch disease. It would be an appropriate initiative for the G8 and would not threaten any internal G8 constituency. The main loser would be China, but its loss would be marginal in view of its current growth. Conclusion The four proposals form a natural package, since they address distinct needs, but they can also be adopted piecemeal. Each addresses a major concern facing the societies of the bottom billion. Voluntary international standards on the management of the resource booms address the biggest single opportunity many of these societies have ever had. A post-conflict compact addresses the fragility of the poorest and most desperate situations on Earth. A charter for the conduct of elections addresses the high-profile disaster of the moment, an issue that will shortly be reinforced by the election in Zimbabwe. A trade concession would address the aspirations of Africa to industrialise and move away from the acrimony of the Lisbon Summit. April 2008 Paul Collier Global policies for the bottom billion 7 www.policy-network.net
progressive governance London 2008 references Collier, P. 007, The bottom billion: why the poorest countries are failing and what can be done about it, oxford university Press. Collier, P. 008, laws and codes for addressing the resource curse, Yale Journal of Law and Human Rights. Collier, P. & Goderis, B. 007, Prospects for commodity exporters: hunky dory or Humpty Dumpty?, World Economics. Collier, P. & Hoeffler, a. 007, Coup risk and military spending, oxford, Centre for the Study of african economies. Collier, P., Hoeffler, a. & rohner, D. 008, Beyond greed and grievance: feasibility and civil war, Oxford Economic Papers. Collier, P., Hoeffler, a. & Soderbom, M. 008, Post-conflict risks, Journal of Peace Research. Collier, P. & Venables, T. 007, rethinking trade preferences: how africa can diversify its exports, The World Economy. www.policy-network.net 8 Global policies for the bottom billion Paul Collier April 2008
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