The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It

January 7, 2008

Introduction

JOANNE MYERS: Good morning. I'm Joanne Myers, Director of Public Affairs Programs. On behalf of the Carnegie Council, I would like to wish you all a very Happy New Year and thank you for joining us today.

We are extremely pleased to begin the year with a very special guest, Paul Collier, whose book, The Bottom Billion, has not only been a bestseller since its publication last June, but has found its way to many of the Best Book lists for 2007.

Professor Collier is one of the world's leading experts on African economies. Currently, he is Professor of Economics and Director of the Center for the Study of African Economies at Oxford University.

The Bottom Billion is an extraordinary work in which Professor Collier's extensive knowledge and meticulous research are brought to bear to answer one of the most important questions in development today: Why, after years of aid and assistance, are so many countries still failing?

In addressing this issue, our speaker overturns some of the most persistent myths that have arisen after decades of failure and provides new thinking about how to fight global poverty now. Most of us have been led to believe that we live in a world where 1 billion people reside in rich, industrialized countries, while 5 billion people live in varying states of poverty in the developing world. But if we look at the data, Professor Collier tells us that this picture is not only too simplistic, but also outdated and just does not accord with the facts as they currently stand.

In his recent work, he points out that after enduring decades of economic collapse and stagnation, global poverty is actually falling quite rapidly for about 80 percent of the population in developing countries. The real crisis lies in a group of 58 failing states, the bottom billion of the world's population, whose problems defy traditional approaches for alleviating poverty. For them, the future remains bleak.

It is important to note that, although 70 percent of the bottom billion live in sub-Saharan Africa, others live in such places as Bolivia, Myanmar, Haiti, Laos, North Korea, and Central Asia. It was Professor Collier's concern for these poorest countries that led him to question why globalization had been able to turn things around for so many nations, but not for others.

Professor Collier spent years trying to answer this question, and his findings are the result of over three decades of research, solid statistical analysis, and time spent in Africa. His investigation led him to discover a series of traps that extremely poor countries tend to fall into, which, left unchecked, will define their future. He discusses each at length. Briefly, they are conflicts; dependence on natural resources, such as diamonds and oil; land-locked geography, which makes these countries dependent on their neighbor's transportation system; and bad governance.

In a call to break the traditional mode of development ideology and to counteract the four traps, he suggests helping these countries not only with aid, but with military intervention, laws and charters for improved governance, and reforms in trade policy.

Paul Collier has spent a lifetime working to end global poverty. In a world that is no longer as it used to be, The Bottom Billion combines perception analysis with incisive and informed points for actions to offer real hope for solving one of the great humanitarian crises facing the world today.

I know you are eager to hear more about his innovative and pragmatic approach to handling the problems of the poorest people on earth, so please join me in giving a very warm welcome to our guest, who traveled here yesterday from London to be with us. Thank you.

Remarks

PAUL COLLIER: Thank you very much, Joanne, for that really lucid summary. Thank you, everybody, for getting up early to come and hear me over breakfast. I am always deeply impressed—as somebody from a society which is not good at getting up early, this American tradition of breakfast talks leaves me stunned. [Laughter]

I wrote The Bottom Billion to be read, and some of you have probably done so. When I give a talk like this, I'm in a dilemma as to whether to bore the people I most want to reward or reward the people I most want to buy the book. So what I am going to do is try to navigate betwixt and between, and build on and enlarge on particular themes in the book. But, of course, the price I pay for that is that I can't cover the whole book, so this is not a substitute for actually reading the thing. But it illustrates a couple of points.

The book is organized as a statement of the problem, a diagnosis of the problem, and a prescription as to what to do. Let me just start with the statement of the problem.

Each of these steps, I should say, is, surprisingly, kind of new. And it shouldn't be new, because it's not amazing. But the profession had, I think, got itself a bit stuck.

The problem statement: For years we thought of the problem as global poverty, and my argument is that that is not a good way of thinking about the problem. The reason why the problem was defined as global poverty, to be honest, came out of the External Relations Department of the World Bank in the 1990s. The World Bank was faced with a public relations dilemma, which was that nobody loved it. The reason that nobody loved it was that the left, which was the constituency that believed in aid, didn't believe in growth, and the right, which was the constituency that believed in growth, didn't believe in aid. The World Bank was an organization of aid for growth.

So it was a dilemma. The left wanted redistribution within societies, and the right wanted growth, never mind aid.

The solution which papered over this division was to say, "It's poverty that matters. We are there to reduce poverty." So the left could hear, "we reduce poverty by redistribution," and the right could hear, "we reduce poverty by growth," and everybody could be happy.

As a public relations exercise, that worked. But it was a public relations exercise. The price that we paid as a community for that definition was that we just lost focus of the real problem. As the headline numbers of global poverty are falling, that disguised the fact that a minority of developing countries was peeling off from the pack. They were basically stagnant. If a bunch of countries are stagnant, whether absolute poverty goes up a bit or down a bit kind of misses the point. The point is, they are stagnant, and because they are stagnant, they are diverging from the rest of mankind.

Just amongst the 5 billion, developing world, before we think about the billion of us—just amongst that 5 billion, the bottom billion, the countries that are now the poorest, diverged at an accelerating rate. By the 1980s and 1990s, they were diverging at 5 percent a year, and by the millennium the gap between the average citizen in the bottom billion and the average citizen in the next 4 billion was five-to-one. Five-to-one, and widening at 5 percent a year.

That's the challenge for development. It is not to reduce global poverty; it's to replace divergence with convergence. The billion at the bottom have not just got to have reduction in poverty; they have to catch up with the rest of mankind. Continued divergence is the road to global social unsustainability, in my view. It's both a human tragedy for the billion people stuck there and a nightmare for everybody else. So there is no alternative but to replace divergence with convergence. And that is a much tougher problem than reducing global poverty, and it's a different problem.

So that's the problem statement.

The bottom billion are not defined as the countries that have not grown. They are defined as being caught in one or other of a set of problems. That is where I turn to diagnosis, and the argument I try to navigate between the big, grandiose explanations—poverty is "the trap"—and the totally particular.

There are four big traps which basically account for the problem. I don't want to exclude other problems, but I think these four traps, which are different one from another, between them, account pretty well for the problem. I haven't got time today to go through all four. I have to pick on one, and the one I'm going to pick on is resource riches, which is, in a way, the most counterintuitive of the traps, because resource riches should be the royal road to transformation—the big money that comes from oil or copper or diamonds or whatever.

It's also really the here-and-now phenomenon. The world is going through an unprecedented global commodity boom, and so there is a tidal wave of money pouring into the countries of the bottom billion, both because of high prices and because they are the last frontier for the resource discoveries. The last frontiers are not technologically defined; they are politically defined. We learned how to do cold weather and deep water back in the 1970s for oil. We didn't face the politically really risky—the Sudans, the Chads—until the 1990s.

So why are resource riches a trap? Here I am going to move beyond the bottom billion and I am going to give you some new words. I have tried to simulate how the present commodity booms will play out, based upon the global experience of the last 40 years. Those of you who have read any of my work will know that what I do is statistical. I look at global history and try to discern statistical patterns and regularities, to the best of my ability.

So we looked to see how, over the last 40 years, an increase in commodity prices had played out in terms of economic growth and development in the resource-exporting countries.

First of all, we found that Africa is no different than anywhere else, which is usually the result we get. Africa is distinctive in having a lot of natural resources, but not in behavior.

What we found was that in the short term everything is hunky-dory. Things go up. They really go up. You have booms. Income goes up; output goes up; everything goes up. That is happening at the moment. It's the predominant reason why Africa is now growing faster. So the short term just looks great.

How about the long term? It depends. But if we take the typical country, the long term is not hunky-dory; it's Humpty Dumpty. That is to say, you fall off a cliff. If we track the typical resource exporter in Africa and we run it through this global pattern—I will just run you through GDP, national income. This is in terms of real output relative to counterfactual. We started at 100 now. By 2010, it's 110. So it's up 10 percent relative to counterfactual. By 2025, it's at 75. It's down 25 percent as a result of the commodity booms relative to counterfactual—a massive loss. So instead of these huge revenues being harnessed for sustained growth, they actually become a disaster.

We then look to see why. The answer is, it turns out, governance. Thirty years ago, my profession, economics, thought it had the answer, which was Dutch disease. It's the thing the IMF [International Monetary Fund] fusses about. There is a sort of cycle in the IMF. When they can't think of anything else to fuss about, they fuss about Dutch disease. It's very minor—very minor. If you get the governance right, you ride out the Dutch disease. There is a threshold level of governance above which these resource booms are not just good in the short term; they are good in the long term. You go up in the short term; you go up even more in the long term.

Norway has not been crippled by Dutch disease. It's the richest country in the world. It didn't used to be. That is true of all the resource-rich countries with good or reasonable governance, initial levels of governance. You need to get your institutions for governance before you get your resources.

So there is this threshold level of governance. Where is the threshold? To take a little country far away that isn't in Africa, Portugal in the mid-1980s is about the threshold above which you harness things for the future, below which you go negative. Portugal in the mid-1980s was one of the weakest governance countries in Europe. But what you have to ask is, how does the Portugal in the 1980s compare with, say, the Democratic Republic of the Congo now? It's not Portugal in the 1980s that is getting this resource boom; it's the Democratic Republic of the Congo now.

The answer is pretty obvious. Most of the countries which are getting these resource bonanzas amongst the bottom billion currently have governance levels where, if history repeats itself, the short term will be hunky-dory and the long term won't.

Will history repeat itself? As an economist, I believe that behavior is determined by incentives, and incentives pretty well come out of institutions. So history will have a nasty habit of repeating itself, unless the incentives—which means the institutions—are different. I think that's not the whole story. I think that one big way in which history doesn't repeat itself is that people learn from history. Even if they don't change the institutions, they just learn from past mistakes. So it's quite possible that there will be enough learning, even without institutional change.

But the big institutional change that has occurred in the bottom billion since the last commodity booms in the 1970s is, of course, democratization. So I looked to see whether democratization makes the management of resource booms better. It makes it worse. I have done this statistically and I have tried to see what the interaction is between democracy and resource riches. It's significant, and it's negative.

Instead of democracy disciplining governments to manage these resource booms well, what happens is that the resource revenues corrupt the normal functioning of democracy—unless you stop it corrupting the normal function of democracy.

What determines whether it is corrupted? The checks and balances which restrain what is legitimate as electoral competition.

I have just studied the presidential elections in Nigeria and now in Kenya, to see what sorts of strategies incumbents can adopt in the absence of effective restraints. How is electoral competition supposed to work? It's supposed to produce good governance because voters reward good governance relative to bad governance. Put yourself in the position of an incumbent president of a society of the bottom billion with no electoral constraints and try to build yourself the menu of possible winning electoral strategies. You find that being a good government is way down the list of cost-effective electoral strategies. Until those other strategies are ruled out by checks and balances and restraints, it's those other strategies that you will get.

So that is one example of the diagnosis. Now to the prescriptions.

What do we do? "What do we do" actually mis-poses it. The struggle in these societies is an internal struggle. I think, again, there has been a lot of miscasting of the problem, as though it's a noble developing world versus a greedy and cruel rich world, a rapacious rich world. I think that cult of the victim has actually gotten in the way of clear thinking within the societies of the bottom billion. Whether it's true or false, it's just a really unhelpful way for the societies of the bottom billion to think through their problems.

The real struggle is not between the rich world and the poor world; it's within the societies of the bottom billion, between people struggling for reform, for change, for restraints on the abuse of power by government—and on the abuse of power, I should say, by armed groups outside government—versus those forces for bad, for inertia.

Our role, outside those societies, is a relatively easy one of trying to strengthen the hand of the reformers. They need their hand strengthened. The forces for inertia have the advantage of money, of guns, and of incumbency. So usually the reformers lose. The amazing thing is that there is a supply of brave, clever people in all of these societies. I know a lot of them, and usually they are exiles, because they have fought and lost. Our job is to get behind them, to improve their chances.

The final part of The Bottom Billion is a prescription. It turns to say, what can we do? Just as the argument of diagnosing the problem is to say we have to focus down on the bottom billion, not a world of 5 billion developing poor, so when it comes to prescription, I think we have to enlarge our array of instruments and think beyond the conventional obsession with aid. I'm not anti-aid, but I think there are many policy instruments that are more potent and that have been neglected.

Here I want to focus, in my remaining few minutes, on one, and it's the one that sounds the weakest. There are four instruments I focus on in the book. The one that sounds like motherhood and apple pie, and what a waste of time, is instruments of governance, international rules, standards, and codes.

It isn't the weakest of the instruments. I am going to close by talking a little about that and applying it to the problem I have identified, which I think of as the single biggest problem, which is these resource booms in the resource-rich bottom billion. What can we do to help and empower the reformers within these societies? We certainly can't do it by giving them aid.

The government of Angola next year will get $50 billion, I think, in oil revenues—$50 billion. Whether it gets a few hundred million more or less in aid is really second-order. It gives us no leverage.

But we can do something by way of voluntary standards and codes. We have already demonstrated their potency. Even in the area of resource riches, we have two voluntary standards and codes which have already proved pretty effective—surprisingly so. They have only been around for five years.

One, which is the Kimberly process, is about transparency in diamonds and about trying to keep diamond revenues out of the hands of extra-government forces, trying to keep them from financing rebel groups. That has proved reasonably effective—an entirely voluntary system. Every diamond-producing country in the world has now decided that it's best to sign up for it. So now there is this gradual process of strengthening the enforcement.

The other is the Extractive Industry Transparency Initiative, something started by a little NGO of 30 people, as a campaign called Publish What You Pay. Now more than a dozen countries have signed up for it. What that requires is a very minimalist thing, which is that governments should report to their own citizens the revenues they are getting from these resource revenues. My God, if they are not even prepared to do that, then you have the answer to how they are going to use it, haven't you?

What else can we do? Let's think through what it means to transform valuable resources under the ground into sustained development. There are five key decision points that a government has to take. If it gets these five points right, it's going to develop. If it gets them wrong, it won't. By having these as voluntary international standards around each of these five decisions, it would guide reformers within these societies. It would be a rallying point. They would know what to demand. They would know how to judge their government.

In closing, let me run through the five points. There is a logical sequence.

Step one is, how do you sell the rights to mineral extraction? You know how they have been sold. You know how they are being sold. Directors of companies fly in, bribe the minister of mining, do a good deal for the company, a great deal for the minister of mining, and everybody's happy except the citizens.

How we get around that is a very simple institutional technology. It's called auctions. The genius of auctions is that government doesn't even need to know what the things are worth, because competition amongst those who do know will produce a fair price, a fair value. The auctions need to be verified internationally. Otherwise, they can be gamed. But verified international auctions for mineral rights would really clean the system up.

The second step is taxing the revenues. The tax regimes in these countries have sometimes been a complete shambles. Democratic Republic of Congo last year—revenue from exports of minerals, several hundred million dollars; royalty payments into the treasury of the DRC, $86,000.

Not just DRC [Congo]. Zambia, exports of copper, $2 billion; revenue to the treasury, $36 million. If it had been the tax regime of Chile, it would have been nearer $800 million.

Absurd errors in tax regimes. A bit of guidance on tax regimes. That's the second point. How do you sell the rights? How do you tax the revenues?

The third point: How much of these revenues do you save as a government, as opposed to just spending on consumption? A big mistake in the 1970s was usually to throw a party. Parties are great at the time. Nigeria had a wonderful party in the 1970s and early 1980s. Then it spent the next 15 years clearing up the broken glass. It was called "structural adjustment." So all Nigerians are convinced that reform just induces poverty, because what they want to do is get back to the party.

So you need some guidelines on what proportion of these revenues should be saved.

The fourth and fifth steps, the final steps, very simply follow from having saved it: What do you do with it? If you are Norway, you bring it here. You stick it in New York. But they are not Norway. That is actually a pretty foolish thing to do. If you are Zambia, having an aid program to America, in the way of building up a big stock of American Treasury bills, is not necessarily the right thing to do. They are desperately short of capital within the country, unlike Norway. So they need, actually, to invest it domestically, but invest it well. "Well" means two things.

First, it means to invest it honestly. That is the fourth decision point. How do you make sure that public investment is not the jamboree of corruption which was the case in the past? That is rules about things like competitive tendering and procurement.

When my friend, Obi Ezekwesili, introduced that in Nigeria, the costs of public procurement immediately fell 40 percent.

Honesty is not enough. You can honestly make awful investments. The problem with the Ajaokuta steel mills [Nigeria] was not that they were corrupt; it was that they were steel mills in exactly the wrong place—the wrong thing in the wrong place at the wrong time.

To guard against that, it's not a matter of honesty; it's a matter of efficiency. That's a technocratic issue, to try to estimate what the rate of return is going to be on this investment. That requires a technocracy and some protection of that technocracy from pressure from the local politicians. Again, that means international verification. Without international verification of the estimates, the minister is going to lean on the junior officials doing the estimates of rate of return and force them to flatter his pet schemes.

So those are five decision points. I have been trying to get the G8 to adopt them as voluntary codes. The G8 is much too interested in whether aid will be doubled, trebled, halved, whatever, in order to attend to something as mundane as whether the resource booms will be harnessed or turn into the disaster of last time.

Potentially, the next G8 in Japan could just promulgate, as guidelines, these voluntary standards on how to manage a resource boom, what the key decision points are. Somebody needs to do it. At the moment, there is an absence of leadership in the international community on development issues. There is a lot of posturing, but there is no leadership.

Let me close by saying why there is so much posturing. There is so much posturing because politicians can get away with it. Politicians, of course, in the developed world, when they posture, are not trying to directly address the problems of the bottom billion. They are directly trying to address the problems of how they get votes in their own societies. I realized that until we had informed citizens in developed countries, we were never going to crack the problem of supporting the reformers in the bottom billion. That is why I overcame the habits of an academic lifetime and wrote a readable book. [Laughter]

Please read it and, if you agree with it, become ambassadors for the ideas.

Thanks very much.

Questions and Answers

QUESTION: You addressed a number of challenges in respect of your subject. One is corruption. One is efficiency or competence. Can you comment on remedies in both those areas? I think, for example, of Transparency International, with which I am involved, which combats corruption in international financial transactions. Does TI do anything in the countries of which you speak?

Second, in respect of efficiency, competence, need we not address the challenge of education?

PAUL COLLIER: I think the answer is TI and TA. Transparency International has been an enormous power for good in the societies at the bottom billion. My friend John Githongo was chair of the Kenyan chapter and had the courage and guts to blow the whistle on corruption in Kenya. TI is the sort of organization which does help to empower the reformers, the people fighting for change, within these societies. It's exactly that sort of empowerment agency that I think is important.

So that's TI, dealing with the corruption question.

Over the efficiency question, TA. What is TA? Technical assistance, the much-despised end of aid. Technical assistance is sending people with skills. I think it's actually pretty useful. I have tried to look at the statistical evidence for it, and I find it's really quite a productive part of aid programs. It trains people, and it even substitutes for people. Both are valuable. For example, in a post-conflict environment, you have to make change fast. You can't wait for people to be trained. You actually have to substitute for the near absence of competence. So in the post-conflict environments, you actually have to send people in to do things. When you have a longer period, you send people in to build competence and train.

QUESTION: Thank you, Professor Collier. Wonderful.

I would make two points. I would like to compliment you on your last point, which is about posturing regarding development. I understand that maybe posturing is helpful to the politicians at the country level. But why posturing at the multilateral level, at the level of the United Nations, at the level of the World Bank, as you started by saying? Why it is so? Why cannot there be an initiative?

You mentioned G8. I believe the United Nations has a major role regarding extractive industries. When I used to work for the United Nations, my responsibility was the poorest and the most vulnerable countries of the world. This is absolutely essential. We worked on Chad, to work out an arrangement for the resources to go to the help and education sectors. But it didn't work. My efforts to raise awareness at the leadership level of the United Nations didn't work either.

So why is there so much posturing and lack of real commitment on development issues at the United Nations level?

Second comment. You mentioned about governance. I believe that what I have seen in my travels around the least developed countries—50 of them have 750 million out of your 1 billion, and rising very fast, adding 200 million more by 2015. So there lies the big challenge. But the area of governance which has been generally promoted by the United Nations, by the donor countries, is basically a dissenter-level governance—parliamentary forms, democratic institutions. But nothing has been done at the local level, at the community level. That is where the development projects of the developing countries go to—the least developed countries.

If we make changes there, it doesn't matter, basically—I would say it shouldn't matter, but it matters—basically, the process of development continues, despite the electoral cycles of democratic governments or countries. That is very important. Donors have avoided that area. Why do you think so?

PAUL COLLIER: Three points. One is, you are right to push me beyond the G8. Quite a lot of my work has been with the G20, actually, which is a halfway house between the G8 and the United Nations. The government of South Africa, which was this year's chair of the G20, twice had me to the G20 meetings to address, specifically, these natural resource issues. South Africa recognizes the importance of the resource booms and the importance of history not repeating itself.

So there is a groundswell amongst the middle-income resource-rich countries to try to get some international standards.

You mentioned your efforts with Chad, and that they didn't come to anything. I, too, was involved in that a little bit. I was in the very tail-end of the salvage operation, to try to stop the Chad government from tearing up the rules.

I don't know if anybody knows what the Chad pipeline case was. People had known that there was oil underneath Chad for many years. It stayed under the ground because of the mis-governance. Finally, the arrangement was that the international agencies would take the responsibility for drawing up a system in which the revenues would go to supervised social expenditures—health and education and suchlike—at least 80 percent of them. On that basis, the oil companies said, "Okay. We have no reputational risk now. We'll do the investment." In return, the government of Chad passed the law enshrining this principle.

As an economist, the problem with this arrangement was that it breached something known as the time-consistency problem. You don't need to be an economist to understand the time-consistency problem. You just have to ask yourself, which is easier to reverse? Once $4 billion of investment in oil wells has been sunk, is it easier to take the investment out again or is it easier to repeal the law?

So within a few months of the oil revenues starting, the government had repealed the law.

I was sent in as part of a last-ditch effort to persuade the government not to do that. It was very nice to have the United Nations onsite. It would have been also nice to have the IMF onsite. But the IMF, I discovered, were passionate critics of the scheme that the World Bank and the United Nations had set up. The reason is so comic that it's just worth recounting.

The guy from the IMF assigned to Chad—Chad is not, you might appreciate, the number-one posting that guys in the IMF want to get. "Yes! I've got Chad!" [Laughter]

So this guy's previous experience had been in Hungary and he had been reassigned to Chad. He had read all the—he was a good fiscal economist. This was a fiscal issue about revenue. What do the textbooks say? 101 Fiscal Economics: What the government needs is an integrated budget. All the revenues come into the integrated budget, because then you can equalize the marginal equivalences on spending on health versus spending on education, versus spending on roads, or something like that.

So the last thing you want is any breach in the principle of the integrated budget. What is the cardinal sin? It's to earmark some revenues for particular expenditures, because then you can't get all your marginal equivalences equivalent.

Dear me, what have the World Bank and the United Nations been up to here? Breaching the principle of an integrated budget. The money coming out of the oil wells was earmarked for health and education and that sort of rubbish.

What did the government want to spend it on? Actually, I will tell you want the government wanted to spend it on. The little country of Chad has 60 generals, and it wanted to spend it on the generals.

What did the IMF say? Well, this is all about marginal equivalences. If the government wants to spend it on the generals, this is welfare-improving, because it gets your marginal equivalences equivalent. So get rid of all this earmarking.

That didn't help. It shows what a cloud-cuckoo world we are in.

I think, to be fair to others, we probably ought to move on.

QUESTION: One of the things that Joanne mentioned on your four points involved the issue of transportation. A very large percentage of these countries are landlocked. I have seen estimates—I think from the World Bank—of somewhere in the neighborhood of a 30 percent increase in cost of goods to market, which obviously hinders development.

Could you comment on that? It was one of your four areas, anyway.

PAUL COLLIER:
Very much so. It's something I feel very passionate about, so I'm glad you have given me the chance to talk about it.

It's a problem of two areas. The region with the most landlocked countries in the world is Central Asia. That's the highest proportion of landlocked countries. Then the other region is Africa. Other than those two regions, within the developing world, virtually nobody lives in countries that are landlocked and resource-scarce. Countries that are landlocked and resource-scarce don't become countries; they become parts of other countries. And that's pretty sensible. In Central Asia and Africa, they become countries.

As you say, one problem is just that transport costs are higher. It turns out that transport costs are avoidably high. To an extent, they are unavoidably high, but they are also avoidably high. This is because the landlocked countries are hostage to their neighbors, to the coastal neighbors. It turns out that the big transport cost differences between landlocked countries is depending upon the infrastructure investment of the coastal neighbor, over which the landlocked country has no control.

This is an issue where national sovereignty gets in the way. The public goods of transport networks are, in this case, regional. In fact, it's worse than that. They are not even regional public goods, because with the genuine regional public good, everybody benefits. In this case, the landlocked countries benefit from the investment of the coastal countries. So the coastal countries don't bother. In fact, it's worse than "don't bother"; they actively mess up their neighbors, as part of the political power play.

How could we counter that—we, outside these countries? We could do it through aid. What we should be doing is top-slicing aid, in the sense of, before we allocate it nationally, saying that a proportion of it—a significant proportion—has to go to these international public goods.

Let's take a case of the moment, Kenya and Uganda. You might have read in the papers that the mess in Kenya is already having a bad impact on the economy of landlocked Uganda. Kenya gets a very large aid inflow each year. The Kenyan government should be told that, in order to get any of that money, the first $50 million or so has to be spent on fixing up the port and the road so that Uganda has as good a possible transport route as possible.

We don't do it. The reason we don't do it is that the revolution in aid over the last ten years has been this principle of country ownership, a move away from donor conditionality to country ownership. We overshot. The principle of us dictating policy to developing countries was a mistake, but moving all the way from that to literally country ownership of these aid receipts is also a mistake. It just sidesteps our responsibilities to these interdependencies, the cases where national sovereignty damages the region. In both Central Asia and Africa, in my view, there are just too many countries, and so national sovereignty keeps on and on getting in the way of regional development. "Landlockedness" is one of the examples. It's not the only one.

QUESTION: Thank you for being so illuminating in all these areas.

One possibility for us as citizens that you haven't had a chance to touch on would be as shareholders in corporations. If the shareholders in oil companies and other major extractors would say, "We want you to use a portion of the profits for education and health and everything else," that could have an impact, just as global warming and other socioeconomic factors can influence corporations.

PAUL COLLIER: I think our shareholder power gives us a lot of scope for disciplining our own companies. Basically, wherever a company has a brand name, it is subject to consumer pressure, and wherever it's a quoted company, it's subject to shareholder pressure. Between them, consumer pressure and shareholder pressure are very potent influences on companies.

I deal with a lot of companies, actually. They are really running scared. Actually, there is a third point. There is shareholder power, there is consumer power, and there is recruitment. The big public companies know that their only chance of recruitment of good people is if they are seen to be companies that people are proud to work for. They know that their own employees will not put up with misbehavior. Somewhere along the line, somebody is going to blow the whistle.

So there is a whole series of checkpoints against the big public companies.

What should we be pushing the big public companies to do? To my mind, for the resource-rich companies, the key thing is not how they spend their profits; it's how they get their rights to mineral extraction and how they report their revenues. It's part of this Extractive Industries Transparency Initiative, which is the reporting of revenues, and the deeper principle of how you acquire the rights in the first place.

About six weeks ago, I addressed the 16 chief executives of the biggest non-oil resource-extraction companies in the world. I was amazed to discover that they are actually quite keen on this idea of auctions, verified auctions. I discovered that the reason they were keen on the idea was that they were running very scared of being squeezed between the devil and the deep blue sea. The devil was China, which was going into Africa and basically bribing its way in, in a way that they couldn't do, and the deep blue sea was the small cowboy companies, which were below the radar screen of shareholder, consumer, and employee pressure. So they recognize that until there is an international level playing field, they have had it.

So there is this surprising amount of support, if we look for it.

QUESTION: I will go back to the oil curse. You mentioned Norway and the way they manage their oil revenue, which we admire. But on the other hand, we have a country like Equatorial Guinea. A few years ago, there was a scandal in that country. The head of state had, I think, $2 billion in his personal account in a bank in Washington, D.C. The U.S. ambassador at the time was pushing for democratization and for better governance. But on the other hand, American business—oil companies, most of them from Texas (I'm not going to mention their names)—complained to the State Department and to the White House, and the ambassador was called back to Washington, D.C., and someone else was appointed.

How do you reconcile the need to democratize and to improve governance with the big interests of investors?

My second question is related to trade. I read in your book that the bottom billion, especially Africa, need to be protected from Asian exports. What do you think of what almost happened last month in Lisbon, when the European Union wanted to impose what is a free-trade agreement with sub-Saharan African countries, knowing that the whole GDP of those countries is equal to Belgium's, I think? How can you create a free-trade agreement between an entity as huge and powerful as the European Union and those countries?

PAUL COLLIER: Two good issues.

The Equatorial Guinea story—I believe that the then-president of Riggs Bank managed to send a letter to the president of Equatorial Guinea thanking him kindly for his large deposits.

Shame. That was the end of the president of Riggs Bank, once that was reported—shame.

Most people are not prepared to put up with this sort of behavior, either in banks or in oil companies. They want to work in an organization that has some standards. We can harness that. The power of decency is very potent. We shouldn't despair.

Believe it or not, I have just been invited by the government of Equatorial Guinea to go. I can't imagine why. There are evidently some people in there who either want to shoot me or want change.

Lisbon—yes, one of the more complicated parts of The Bottom Billion is about trade issues. What I argue is that what Africa needs—not all Africa, but countries like Kenya, Ghana, countries that are pretty developed by African standards, coastal, resource-scarce, have some scope for breaking into global manufacturing markets—they need a temporary boost, by temporary protection from Asia in our markets.

The nature of manufacturing is that there are scale economies in production. Firms get together in clusters. Asia has these clusters, and that drives these costs down. So at the moment, it can out-compete Africa. Even as it develops and drives its wages up, it can out-compete Africa.

The single thing you will remember from this talk in a year is what I am about to say: the power of clusters in globalization. This has to do with buttons. Sixty percent of the world's buttons are made in one city, "Buttonopolis." The reason 60 percent are made there is not because Mega Button, Incorporated, happens to be there. There is no Mega Button, Incorporated. It's just that firms, by being together in the same city, get their costs down.

So how is Kenya going to compete in the world buttons market with Buttonpolis? The answer is, it's not. But, fortunately, the power of scale economies in clustering, in some activities, is weaker than buttons. (I don't know why it's so strong in buttons, but anyway.) In textiles there are still these powers of clustering, but it's not quite as powerful.

So in things like textiles—shoes would be another—by giving a bit of temporary protection to Africa from the established Asian producers, the clusters could form in Africa. Once they have formed, they would have these scale economies from the clusters, and then we could take away the protection.

So it's a chicken-and-egg problem. Both America and Europe are actually doing that already. But the devil in any trade policy is in the details. That's why trade is so badly misunderstood.

The American scheme, the African Growth and Opportunity Act, is flawed in a lot of details, but it's not fatally flawed. In work I have done since The Bottom Billion, I compare AGOA, the American scheme, with Europe's scheme, Everything But Arms. AGOA has increased African textile exports to America sevenfold in five years. That's not bad, sevenfold. That's super-East Asian growth rates, but in Africa. So as bad as AGOA is—it could be a lot better—it worked.

Europe's scheme—as a European, I am proud. All Europeans know that we are the ones who care about Africa, not you heartless lot across the pond. So it's very painful to discover that AGOA works really very well, this sevenfold increase, and EBA, the European scheme, is worse than useless. Over the same period, exports to Europe have actually fallen absolutely.

Why? Because there are two details in the European scheme that are wrong. One is, the wrong countries are covered. The American scheme embraces a broad group of countries, including Kenya and Ghana. In the European scheme Kenya and Ghana are out.

I went to the Trade Director General of the European Community and said, "Why?"

He said, "Oh, we want to focus down on the poorest, least developed countries, because they are the ones that need it most."

That was a pretty convincing argument—until you switch your brain on. It means that if you want to set up a shirt factory to sell to Europe in Somalia, that's just fine; go right ahead. Ghana, no. Sorry.

Just to make doubly sure, the other part of the European scheme is concerned with something called rules of origin. Oh, you don't want to know about that, not at breakfast.

Anyway, rules of origin are about what you can import into the thing and still it counts as if it was exported.

So the American scheme only works—only one tiny part of AGOA works, and that's the bit where you have been generous and sensible about rules of origin. The rest of the scheme is totally useless. Ninety-nine percent of AGOA is a waste of time. It's just one little sliver that's covered by something called a special waiver that works.

Europe doesn't have the special waiver at all. In fact, it has very, very restrictive rules of origin. Basically, you have to make the whole damn thing, buttons and all, in the country.

So I asked the director general why. Again, he looked meaningfully at me and said, "Because we want to encourage deep, integrated industrialization in Somalia."

That is a worthy goal. It has just delivered zero.

Europe needs to rethink its trade policy to Africa. The EBAs were an opportunity to do just that. What the deal should have been was, tear up Everything But Arms and get it right; basically, go for a super-AGOA.

One of the things I have been trying to persuade the OECD [Organization for Economic Co-operation and Development] to do is to adopt AGOA across the OECD, so we don't have a European scheme, a Japanese scheme, an American scheme; we have one damn scheme. It's hard enough for Africa to export to the OECD without having to work out, "All right, this shirt has three African buttons, so we can sell it to Britain, whereas this shirt we can sell to America." It's ridiculous.

But the next best thing is to at least align Europe's scheme so that it's similar to AGOA.

I talked with Mandelson about this, the European Trade Commissioner. He said, "Why don't we just align with AGOA?" His director general was there and looked like a sort of sick parrot. They haven't done that. Instead, they have pursued a different agenda, which was, as you say, the Lisbon car crash.

JOANNE MYERS:
I would like to thank you very much for ending with the button. It was a perfect closing. I thank you very much.

For more information on Paul Collier, go to: http://users.ox.ac.uk/~econpco/

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