Book review: “The Bottom Billion” by Paul Collier

I’ve got a hip-high pile of books by my bedside, including several manuscripts written by good friends. But after Paul Collier’s talk at TED, his book moved to the top of the pile, and I spent a rainy Saturday diving into his new book, “The Bottom Billion”. It was time well spent.

Collier has dedicated the last thirty years of his life to the study of African economics, as director of the development research group of the World Bank and now as Director of the Center for the Study of African Economics. While he’s got a wealth of technical papers, “The Bottom Billion” is his first consumer book – at TED, Collier explained that he hoped to write an economics book that could be read on the beach. That might be a stretch, but it’s a good, quick and enlightening read, assuming you’re interested in the basic questions of development economics.

The most basic question addressed in development economics is “Why are some people poor?” There tend to be two highly political answers to this question: “Because capitalism is unfair” or “Because poor people don’t work hard enough.” Neither’s an especially satisfying response, and neither is well supported by data. The rise of China, India and Asia has had far more to do with embrace than rejection of the principles of capitalism, and those societies have collectively pulled hundreds of millions of people out of extreme poverty. On the other hand, hard work and embrace of free market principles isn’t likely to have much impact on a rural farmer in Chad.

Most development economists avoid arguments this simplistic, but they’re subject to their own polarization. Two of the most influential popular economic books offer the contradictory advice that rich countries need to give the developing world a whole lot more aid, and that development aid is, for the most part, a near-criminal waste of money that damages as much as it helps. Collier, to his credit, references both Sachs and Easterly in “The Bottom Billion”. A warning to my Sachs-phobic readers – he’s a fan of Sachs’s economics, though he’s far more critical of his advocacy for increased aid.

While Collier’s work is significantly more nuanced than most popular books on development economics, he’s not exactly shy or soft-spoken. He’s particularly contemptous of ideological dreamers, with a special disregard for Marxists. (In describing China’s recent economic success, he notes, “Mao made his own invaluable contribution by dropping dead.”) But he’s almost as critical of free marketeers who believe that markets will solve all development problems, especially in the poorest countries of the world.

Collier is optimistic about the future for most of the world’s people. Nations like China and India are on the right track to “converge” with developed nations, in the long run, just as the poorest members of the EU (Ireland and Portugal, when they joined) have seen their GDP per capita match those of their neighbors. Many of the nations of the world are genuinely “developing” – as they develop further, they’ll become fully integrated into the global economy and provide more opportunities for their citizens.

The problem is a set of nations that aren’t developing. Since the 1960s, when many of these countries threw off foreign rule through colonialism, these nations have progressed very slowly or, in some cases, regressed. Most of these nations are in sub-Saharan Africa, but countries like North Korea, Burma, Afghanistan and some other Central Asian nations also are home to members of the bottom billion. Collier refers to this set of nations as “Africa+”, but that’s a bit deceptive – all his examples come from Africa, though some lessons may be applicable to countries like Tajikstan as well. (He never quite defines the set of nations – South Africa is explicitly exempted, and I assume nations like Botswana are as well – less clear if nations “on the bubble” like Senegal and Ghana are included.)

Leaning on Jeff Sachs’s identification of malaria as a “development trap” that can keep a nation from growing, he identifies four traps that the bottom billion nations are stuck in. Some suffer from only one of these traps – most suffer from two or more.

Conflict: The single easiest way to destroy economic development in a nation is to fight a civil war. Civil wars last a long time – six years on average – and devestate the local economy. Growth is reduced 2.3% per year on average in the countries Collier and colleagues studied. When you consider the effect that wars have beyond a nation’s border, especially impact on the economies of neighboring countries, the cost Collier estimates for a civil war is $64 billion. That sounds like peanuts in comparison to the cost of the civil war we’ve managed to bring about in Iraq, but it’s huge in the terms of bottom billion nations – it’s just below the GDP of Ethiopia, a country of more than 70 million people.

Collier and friends have also demonstrated that poor nations are far more likely to fall into civil war than wealthy ones. He’s skeptical of ideological explanations for civil war, believing that they take place, basically, when a group sees the opportunity to buy some guns, loot the national treasury and, preferably, exploit a nation’s natural resources. He calculates that the average low-income nation has a 14% chance of falling into civil war in a five year period – this percentage goes up if the nation’s economy is stagnant or contracting.

We shouldn’t expect civil wars to go away, even with the arrest of bastards like Viktor Bout – it’s just too easy to overthrow a government. “Rebel leader Laurent Kabile, marching across Zaire with his troops to sezie the state, told a journalist that in Zaire, rebellion was easy: all you needed was $10,000 and a satellite phone. While this was obviously poetic exaggeration, he went on to explain that in Zaire, everyone was so poor that with $10,000 you could hire yourself a small army.” And the satellite phone? You use that to strike deals with resource extraction companies for the territories you seize.

Natural resources: For those of us who are obsessed with international development and have no formal economics training, it’s often disturbing to find out what sort of questions economists don’t know the answers to. (It seems like we should have a much better answer to the question, “Does aid work?” before giving lots more of it, for instance.) Weirder are some of the answers we do have. For instance, it’s pretty much conventional wisdom in developing nations that being “blessed” with natural resources is a bad thing.

Natural resources tempt would-be rebels, but that’s not the main problem. More troublesome is “Dutch Disease”. This is an economic term coined to explain the slowing of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s. In all economies, people want foreign currency so they can purchase imports. They trade with domestic exporters, who earn foreign currency by selling goods abroad. When a country discovers oil, for instance, it’s very easy to turn that resource into hard currency. Activity in that sector tends to “crowd out” other activities, especially the sort of labor-intensive manufacturing that’s helped economies like South Korea and Singapore move into high income strata.

Collier believes that Dutch Disease is a critical concept in understanding the bottom billion, and that aid can cause the disease just as surely as oil. But he sees other corrosive effects of natural resources – specifically, he thinks natural resources tend to subvert democracy. In a functional democracy, politicans are rewarded for policies that improve society. In natural resource-rich societies, he sees politicians more frequently rewarded for bribery and patronage. Collier terms this “survival of the fattest” and suggests that Nigeria in the 1990s is a pretty good example of what emerges when this happens.

As Collier argued in his talk at TED, the solution to this problem is to focus on the checks and balances of democracy, rather than on elections. Countries that have survived major natural resource discoveries have strong democratic institutions, especially a strong free press.

Landlocked with bad neighbors: Landlocked nations have a problem exporting – they don’t have ports. Somehow, this isn’t a problem for Switzerland in the way it is for Uganda. But Switzerland has some very wealthy neighbors, and these neighbors can serve markets, as well as providing infrastructure to use their ports. Uganda’s neighbors are much less wealthy, and relying on Kenya’s infrastructure to export wasn’t a great idea for Uganda even before the recent post-election crisis.

Collier has less helpful thinking on this topic that on most others – he advises these nations to rely on remittances, to ensure that they’re not “airlocked” or “e-locked” due to poor internet access (which is a challenge, as the fastest net access is through undersea cables) and to try to change their neighbors economic policy, while acknowledging that this rarely works. Unfortunately, he concludes, some of these nations simply shouldn’t exist as independent states – their boundaries are the consequences of Europe’s colonial carve-up of the continent. That depressing idea resonates with me, and seems to intersect with Lant Pritchett’s observation that Zambia currently has way too many people now that the copper mines have been exhausted – the fixed and non-porous nature of borders is going to be a problem for Africa for years to come.

Badly governed: Governance has been the cause celebre of the US aid community for the past decade – if you wanted money from USAID, you’d be well advised to build an economic growth program based around good governance and accountability. Collier is less worried about poor governance than many economists – he points out that Bangladesh was able to achieve economic growth despite being tied for the most-corrupt government in the world for many years. The path to economic success for Bangladesh was pretty conventional – high-labor manufacturing, a sector that, Collier asserts, doesn’t require too much goverment intervention to make work in countries with large labor forces and ports.

The situation is different in small nations, especially small, landlocked nations like Chad, which tied Bangladesh for the dubious honor of most corrupt government. Conventional paths to economic success are closed off, and the government needs to be more than “not a hindrance”, but an active player in creating economic development. Unfortunately, some of these nations simply cannot provide services to their populus anymore – Collier lists Angola, Central African Republic, Haiti, Liberia, Sudan, the Solomon Islands, Somalia and Zimbabwe as states that he would classify as failed under political and economic critera. (I assume Liberia is improving, and I wonder if a current list would include Guinea-Bissau.) Collier estimates that the cost – to citizens of the nation, to neighboring nations, to the world as a whole – of state failure at roughly $100 billion. Unfortunately, when states descend to this poor level of governance, they have a very small chance – 1.9% per year – of experiencing a turnaround.

Of the bottom billion nations, 73% have experienced civil war, 29% have economies dominated by natural resources, 30% are in landlocked nations, and 76% have experienced a sustained period of bad governance – some unlucky nations have three or more factors working against them. Collier believes that the two solutions most often prescribed for the developing world – trade and aid – won’t be enough for these nations, which are failing to develop.

Freer trade could help the bottom billion, but it needs to be the right kind of trade. Collier sees a great interest – especially from China – in African natural resources, but predicts that economies that overfocus on natural resources will become increasingly corrupt and increasingly uncompetitive in other industries. Most countries that have developed significantly have large manufacturing sectors, and their manufacturing exports earn vastly more than natural resource exports.

Manufacturing, however, requires major upfront investment to purchase factory equipment. We’d hope that global capitalism would mean that adverturous investors would be pouring money into these poor nations to spark manufacturing development. Nope – these markets are too risky, and most international investors steer clear. (See the country rankings from Institutional Investor to get a sense for the sorts of nations that are too high-risk for most investors.) Instead, the globalization of financial markets means that capital flows out of very poor countries, not it. If you’re lucky enough to become wealthy in the Central African Republic, you’ll likely choose to get your funds the heck out of your home nation, rather than investing in local industries. Collier sees a similar pattern with talented labor – if you’re a smart, ambitious Chadian, your temptation is to look for success in a global talent market, not stay at home.

(I think Collier oversimplifies these arguments. There’s a growing group of brave Africans looking for ways to return home and invest money earned in North America and Europe in their home countries. That said, while I’ve got piles of anecdotes about these investors, I have no idea if their total contributions would affect Collier’s statistical analysis at all. Ultimately, that’s the challenge in arguing with Collier – he’s dealing in broad statistical analysis, and it’s hard to know how much any single counterexample challenges his conclusions.)

The most depressing part of this argument is that Collier believes some of these nations may simply have “missed the boat”. They might have had a chance to enter into labor-intensive fields a couple of decades ago – now those fields are so thoroughly dominated by nations like China that these countries might need to wait for China to develop to the point where labor becomes expensive, a process that might take decades to become widespread.

If globalization won’t save us, perhaps increased generosity and compassion, expressed via aid, might. Nope. Collier is skeptical of many forms of aid, pointing out that in a dysfunctional state, many types of aid never reach their destined recipients, lining the pockets of corrupt politicians and subverting the rule of law. (Again, the example of choice is poor Chad, where a study of money donated to support rural clinics discovered that less than 1% of money donated was used for its intended purpose.) Aid dollars siphoned off by corrupt governments often end up financing military expenditure, which can fuel the conflict trap so many nations fall into.

Collier ends up promoting a kind of aid that’s become extremely unpopular in liberal development circles: technical assistance. This involves paying experts from developed nations to offer advice and training to governments and businesses in poor nations. It’s the business I used to be in, and I’ve fielded my share of criticisms that giving money to wealthy American PhDs is a stupid way to go about development. Collier counters that very poor nations often don’t have human resources in key fields and need to import trainers, and that technical assistance is one of the few forms of aid that isn’t susceptible to corruption or Dutch Disease. He also favors aid to build the infrastructure that makes exporting possible.

So if aid and markets alone won’t help us, what will? Collier has solutions, but they’re technical, policy-directed and less sexy than you might hope. It’s hard to imagine a pop concert on five continents pushing for improved international norms of transparency on natural revenues accounting, but that’s the sort of change Collier believes the bottom billion needs. Specifically, he’s in favor of:

– Targetted military interventions. Collier understands that it’s politically untenable to advocate for outside regime change in the waning days of the GWBush era, but he notes that there are cases where military force allows very poor nations to get back on a path towards development. His analysis of British intervention in Sierra Leone suggests that the economic benefits of ending a civil war exceeded the cost of intervention by a factor of 32.

– A set of international charters that set basic standards for developing nations to follow, in the fields of natural resources transparency, democratization, budget transparency, investment and the management of post-conflict situations.

– A lowering of OECD trade barriers towards bottom billion nations and barriers between bottom billion nations. Collier promotes an unusual strategy to encourage export diversification in bottom billion nations – he recommends maintaining tarrif barriers with Asian nations and eliminating similar tarrifs with the bottom billion – AGOA done correctly, in effect, over a long period of time.

– A rethinking of the reciprocal nature of the WTO – bottom billion countries shouldn’t be striking bargains with rich nations. They need a trade forum where wealthy countries are willing to make concessions on development grounds.

After Collier’s brilliant articulation of the problems facing bottom billion nations, I expected a call to action that would send me into the streets, rather than sending me to Wikipedia to review the history of GATT and the WTO. That might have been overly optimistic on my part. Solutions to problems of this magnitude are going to require changes in multilateral institutions and international norms.

The problem, I suspect, is that if I have trouble getting excited about Collier’s proposals, it’s going to be difficult to get people not obsessed with international development pumped up. Collier acknowledged this problem in his TED talk, ending with a story that a blogger had written “Collier is not charismatic. But his arguments are compelling.” That’s why, Collier said, “If you agree with that comment, you realize that I need you.”

I don’t think it’s charisma that’s the problem – I think it’s complexity. Collier does the best job I’ve seen of answering the question, “Why are nations trapped in poverty?” It’s going to take more effort – from him and from other people who care about this topic – to make a set of policy recommendations and build a movement around them that’s as cogent and compelling as the first half of this book.