A master-class in bridging research and policy
I approached The Bottom Billion with trepidation, but do you know what – I loved it. I was wary because I’m not naturally sympathetic to the kind of heavy-duty econometrics which is Paul Collier’s stock-in-trade, especially when the results depend on the use of unexpected transformations or recondite instrumental variables. Let’s be honest: it doesn’t help that I can’t do that kind of work and don’t usually understand it. However, I have always recognised that Paul has an extraordinary ability to apply sophisticated technique to answering high-level common-sense questions about the world, and that he then uses his results to tell stories that, In Diane Stone’s phrase, ‘capture the political imagination’.
Paul’s story-telling is beautifully on display in The Bottom Billion. The logic is tight, but the text is devoid of equations and rich in anecdote. The book offers a master-class in bridging research and policy. Whether the arguments are right or not, and we will come shortly to the substance, consider the power of the narrative:
- Policy-makers need to focus. 80% of the poor live in countries that are developing, ‘often at amazing speed’ (Pg 3). The core development problem is how to raise the welfare of a billion people living in 58 countries that are ‘falling behind and often falling apart’ (Pg 3).
- More precisely, these countries are afflicted by one or more of four, interlocking poverty traps: (a) conflict; (b) natural resources; (c) being landlocked with bad neighbours; and (d) bad governance in a small country.
- Conflict, especially civil war, is the first trap. 73% of people in the societies of the bottom billion have recently been through a civil war or are still in one (Pg 17); having experienced a civil war doubles the risk of another conflict (Pg 27); and a typical low income country faces a 14% chance of civil war in any five-year period (Pg 20). The costs, of course, are enormous: a typical civil war costs the country and its neighbours $US64bn (Pg 32); war reduces growth by 2.3% per annum, ‘so a typical seven-year war leaves a country about 15% poorer than it would have been’ (Pg 27).
- An abundance of natural resources is the second trap. Natural resources are associated with Dutch disease, but in addition, and above a threshold, ‘resource rents make democracy malfunction’ (Pg 42). The threshold is 8%: ‘by the time natural resource rents are around 8% of national income, the growth advantage of democracy has been eliminated’.
- The third trap is being landlocked and surrounded by bad neighbours. Being landlocked can be a disadvantage because of high transport costs, but Switzerland, for example, thrives because its neighbours are prosperous: Italy, Germany and France are its principal markets. ‘If you are coastal, you serve the world; if you are landlocked, you serve your neighbours’ (Pg 57). For landlocked countries in the world, the average growth spillover – the ratio of growth in the landlocked country to growth in its neighbours – is 0.7. The countries of the bottom billion, however, mostly have bad neighbours, in the sense of offering poor markets, orient themselves to the rest of the world rather than their neighbours, and therefore have much lower ratios. In Africa, for example, the growth spillover is not 0.7 but only 0.2. It might be higher if transport links were better – but regional transport is a public good and therefore under-resourced.
- The fourth trap is bad governance in a small country. Three quarters of the bottom billion live in countries that have at some time been failing states, and turn-around in those countries has proven to be remarkably difficult: ‘the probability of a sustained turnaround starting in any year is . . . a mere 1.6%’ (Pg 71). Democracy has little to do with turnaround; finding and sustaining reformers – the ‘heroes’ – a lot. A failing state, by the way, is expensive, to itself and its neighbours – costing about $100bn on average (Pg 74).
- Globalisation is not going to solve these problems. Indeed, the states of the bottom billion are increasingly marginalised, as economies of agglomeration direct investment and skilled labour to countries already moving up the ladder (viz China and India).
- What then will solve the problems? Aid has been no more than a holding operation, can reinforce Dutch disease and has declining marginal returns (16% of GNP is cited as a threshold beyond which returns are negative). Furthermore, there is clear evidence of leakage into military spending: perhaps 11% of aid leaks in this way, financing as much as 40% of Africa’s military spending (Pg 103). Importantly, the evidence suggests that financial aid provided too early in a reform process is counterproductive: ‘it makes it less likely that the reform will maintain momentum’ (Pg 115). Instead, the econometrics suggests that the emphasis should be on technical cooperation, to build policy and strengthen the hand of the reforming heroes. When financial aid is provided, it should finance transport infrastructure, and other supply-side investments which reduce the risk of Dutch disease.
- Military intervention is another useful instrument, in the right circumstances, and provided it is sustained. Sierra Leone is the shining example.
- Laws and charters can help to set standards which shape behaviour and again strengthen reformers – in both rich and poor countries. The Extractive Industries Transparency Initiative is one example. There should be others: for managing natural resource revenues; for democracy; for budget transparency; for post-conflict situations; and for investment.
- The bottom billion countries need to diversify into manufacturing trade. This will not happen simply by removing OECD trade barriers, or through fair trade schemes which lock them into poverty; the key is temporary protection from successful manufacturing exporters in Asia, along the lines of the US African Growth and Opportunities Act, or the EU Everything But Arms scheme – though in both cases with amendments. Note that protection should only be extended to sectors in which there is already favourable treatment for Bottom Billion countries. In practice, this presumably means mainly textiles.
- Finally, who is going to make all this happen, overcoming along the way the free rider problems and the coordination issues? The reformers in bottom billion countries themselves are the main actors, but a clear agenda emerges for the G8: ‘we need to narrow the target and broaden the instruments’, Collier concludes: ‘that should be the agenda for the G8’. (Pg 192)
Why do I think that ministers, heads of agencies, business leaders, and their advisers, will fall on all of this like hungry wolves? Five reasons. First, it’s short. Second, it’s a good read. Third, it provides a coherent and comprehensive narrative. Fourth, it’s obviously based on a great deal of very serious research. And fifth, it tells them and all of us what to do. The inter-weaving of logic, anecdote and quantification is especially attractive. Paul doesn’t seem to meet many landless labourers or slum dwellers on his trips around the world, but he does have some good chats with Finance Ministers, and they, as we, are impressed by his numbers: $64 billion for a war, a 1.6% chance of a turnaround in any one year, 0.2% growth spillovers, 11% leakage into military spending. Expect to see these numbers in speeches and policy papers, even more frequently than they already are.
Is the grand narrative right?
So is the analysis right? That, of course, is the $64,000 question – a number I will use next time I find myself in a room full of Finance Ministers! This is not the only grand narrative on offer. Indeed, this grand narrative explicitly sets out to overturn – or at least supplement - others, particularly the MDG narrative, associated with Jeff Sachs’ Millennium Report, with its focus on ‘quick wins’ and a big push targeted on the poor. We don’t find much here about anti-malarial bed-nets or fertiliser packages, about the Global Fund for HIV/AIDS or the Millennium Villages. It’s an ironic by-product of the Bottom Billion that it makes Jeff Sachs, so often criticised for developing global blueprints, look like the cheer-leader for projectised interventions.
There have been other grand narratives, of course. For nearly two decades, the dominant paradigm of international development was the Washington Consensus, focusing on the need to maintain macroeconomic stability and liberalise prices and policies. Jo Stiglitz developed a post-Washington Consensus, with more emphasis on growth and poverty reduction. More recently, Hae-Joon Chang has developed a historical grand narrative, which argues strongly that rich countries have ‘kicked away the ladder’ and that protection is the only solution for poor countries.
My own venture into grand narrative was in a 2005 paper called ‘The Washington Consensus is Dead: Long live the meta-narrative!’. A summary of the ‘meta-narrative’ is reproduced in Appendix 1. It attempts to broaden the agenda beyond poverty reduction, narrowly defined as increased income, and also recognises the importance of security issues, of the capacity to trade and of the need for state investment in market institutions. It has quite a bit to say about aid and aid architecture.
More recently, I have been concerned with the implications of there being two very different, but interacting development agendas in aid-dependent countries (the 20% Club) and non aid-dependent countries (the 0.2% Club): focusing on the former obscures the impact of Asian drivers on the global economy and also the salience of global public goods (including climate). I have also produced a short statement of my own on ‘Ten Steps to a new development agenda’, aimed mainly at the OECD aid and foreign policy communities.
Citing these is not to set myself up in competition, but rather to provide me with a way of asking whether Paul is framing the question in the right way. Here are some thoughts on that subject:
- First, an obvious set of points to make is that there are lots of poor people outside the 58 countries which are the subject of this book, that there will still be many in 2015 - and, though this is more contestable, that development practitioners have a legitimate commitment to their well-being.
- Second, it does seem to me that Paul underplays the impact of global drivers. It is interesting that, having introduced the four big traps, he then has to write what he describes as an ‘interlude’, explaining why catch-up is difficult when India, China and other tigers have established economies of agglomeration which make others uncompetitive. There may be off-setting opportunities to leap-frog in terms of technology, and there is, by the way, a respectable academic literature on the advantages of being a latecomer – but taking Collier’s analysis on its own terms, shouldn’t there be fifth trap, ‘being a late starter’?
- Third, and more generally, the logic presumably is that if only Bottom Billion countries had not been poorly governed, landlocked, afflicted by conflict, or stymied by a natural resource curse, then they too could have become tigers. Tanzania could have been Thailand. Cameroon could have been Korea. Togo could have been Turkey. Maybe. But that doesn’t sound very historical to me, or geographical. Is there nothing to be said about colonial history, geography, technology? For example, Jared Diamond is very interesting on the importance of latitude in shaping the spread of agricultural technology out from the golden triangle, and about the importance of some animals being easy to domesticate and others not. Similarly, David Landes has important points to make about the social determinants of long-term technological progress. And I can imagine political scientists wanting to add a great deal more on the deep determinants of political development. There is of course a large literature on the determinants of growth, to which Tony Killick among others has contributed.
- Fourth, while we’re on global drivers, there’s very little here about global risks, including climate change, but also issues like financial imbalances. The same is true of opportunities. For example, there’s a little bit about migration, mostly rather sceptical about its potential except for skilled workers. Are there issues about the existence of global institutions and who has access to them, that might influence development options?
- Fifth, would it have been useful to have more on distribution issues? Paul exhibits a touching faith in the power of growth to deliver poverty reduction, and in a set of generic macro and micro policies to deliver growth. It is not clear whether he accepts the conventional wisdom on poverty reduction, as expressed for example in the World Development Report for 2000/1, that poverty reduction requires a three-legged combination of opportunity, empowerment and security: growth really only features in the first of these.
- Sixth, there is surely more to be said about the role of state. Paul Collier does not give us the evidence here to test for deviations from a standard Washington Consensus model of development. However, market failure is ubiquitous in very poor countries and predisposes to some form of intervention.
- Seventh, sectors are little discussed, apart perhaps from infrastructure development, as the antidote to Dutch disease, and a plea for labour-intensive manufacturing. As Paul well knows, there are, for example, lively debates about the role of agriculture and the potential for an African Green Revolution. There are also debates about the investments needed to enable Africa to industrialise, for example in tertiary education (Lall). Services have also risen up the policy agenda.
- Eighth, this matters because a detailed analysis of sectoral options reveals the important fact that the development context is changing in many ways other than related to Asian growth. For example, rapid urbanisation in poor countries is likely to induce significant change in food systems, quite possibly to the detriment of small farmers. Similarly, it is worth bearing in mind that food prices have fallen for a generation (until very recently), so that an African Green Revolution will have to be engineered at prices little more than half in real terms of those that prevailed at the time of the Asian Green Revolution.
Note that all these points are independent of whether the core econometrics Paul reports is right or not. I’m not in a position to say whether war reduces growth by 2.3% per annum, or 2.2% or 2.4%, or 0% or 100%. What I do know is that in the areas with which I am more familiar, coefficients like these generate a great deal of debate. For example, there are widely varying estimates of the share of GNP beyond which aid exhibits declining returns – ranging up to 40% in some models. By the same token, Paul Collier’s own results about the relationship between good policy and aid effectiveness have repeatedly been questioned. Readers should admire the power of Paul’s numbers, but also take them with a large pinch of salt.
Leaving the econometrics in place does Paul Collier’s story about the world stack up? It would be ungenerous not to recognise that conflict matters, that natural resource rents can be misused, that being land-locked can be a disadvantage, that bad governance impedes development, and that all these interact. A more complete story might add that
- Growth is a necessary but not sufficient condition: an inequality trap.
- Manufacturing catch-up is very hard: a catch-up trap.
- Natural resource endowments are often unpromising in Bottom Billion countries – poor soils, uncertain rainfall, little potential for irrigation: an endowment trap.
- Health conditions are often poor – high propensity for disease, for example: a health trap.
- Technological progress is very rapid in the world and not always open to leap-frogging by the poorest countries: a technological gap.
This is a fun game. How many other traps can we identify?
How about the policies?
Paul Collier’s policy agenda is full and interestingly counter-intuitive. Not many stand up these days for technical cooperation, and few argue that post-war countries should receive less aid not more, at least in the early years. His advocacy of military intervention and of protection for some manufacturing sectors will raise eyebrows in some circles. His enthusiasm for codes, standards and charters is also notable.
In the end, though, many of the recommendations are unexceptionable. Phasing out aid to middle income countries; trying to deal with conflict; helping to avoid Dutch disease; building regional infrastructure; supporting reformers – none of these is far from conventional wisdom, as found for example in the Report of the Africa Commission, or in a series of British Government White Papers. Indeed, the British Government is ahead of Paul on some aspects, for example its commitment to build the capability, accountability and responsiveness of states.
If we compare the Collier list to the current debate about development aid, what else might we want to add?
- A stronger narrative about global social justice.
- An imperative for humanitarian aid, not least in the very post-conflict countries which are allegedly over-aided.
- A similar commitment to basic education, health and nutrition, in all countries.
- An opportunity to contribute to poverty reduction in middle income countries.
- An appropriate regime for debt relief.
- Better rules for, and better governance of, military intervention.
- A wider vision of what foreign policy can contribute to global opportunities, over and above military intervention.
- More on business partnerships, including better management of the supply chain to increase local capture.
- More charters and international legal frameworks, for example for migration.
- More emphasis on regional institutions.
A debate that needs to happen
I said I loved this book. I didn’t say I necessarily agreed with all of it. What I do think is that the development community needs to be having a debate at this level of generality. That’s not instead of a more detailed discussion about how to manage development policy-making at the country level or about how to restructure the aid industry. In a sense, though, it is difficult to have more detailed discussion without first taking a view on grand narrative. Perhaps better, there needs to be iteration between grand narrative and detail.
The meta-narrative (revised)
- The Millennium Declaration provides the framework for thinking and action on international development, beginning with core values like freedom, equality and solidarity, and covering peace and security as well as development and poverty reduction.
- Each of these contributes to the others, and none should be pursued at the expense of the others. Security does need attention, but development and humanitarian money should not be ‘raided’ for that purpose.
- Social exclusion is both a cause and a manifestation of poverty. That is why action to tackle discrimination and guarantee all forms of rights needs to sit side by side with action to increase income.
- That is also why growth, even pro-poor growth, needs to be complemented by measures to reduce asset and income inequality – equity has an instrumental logic (redistribution can make growth easier and poverty reduction faster) but also has intrinsic value in a fair global society.
- Improving health and education contributes to the progressive achievement of economic and social rights as well as to long term reduction of poverty, but needs to be balanced against investment in productive sectors, especially those (like rural development ) which benefit the poor. An imbalance in public expenditure needs to be rectified.
- Considered in aggregate, developing countries, and the poor within them, can only gain from a long term increase in trade, especially in manufactures and services. However, they should absolutely not be exposed to sudden liberalisation without substantial investment in capacity to supply and, equally important, a guaranteed safety net against falling prices and import surges. Adjustment assistance needs greatly to be increased.
- By the same token, market liberalisation within countries will deliver faster growth and poverty reduction, provided markets exist and market institutions are in place. Where these conditions are not met, prior investments are needed and liberalisation should be phased.
- Social protection – safeguarding health, nutrition and livelihood - needs to be at the heart of poverty reduction strategies. It is right that no country committed to universal primary education should be debarred from providing it by lack of resources. The same should apply to any country committed to eliminating hunger and malnutrition.
- Poor countries need well performing public institutions, low levels of corruption and high quality service delivery. There are no simple solutions – certainly not simple targets – but a combination of results-based approaches, local engagement, and, in some cases, the extension of choice, will do the trick.
- Poverty Reduction Strategies provide a good vehicle for concentrating the minds of developing country governments and their people, as well as donors – and should be judged both by their content and by the quality of the political process they engender. For example, they should not neglect productive sectors or cross-cutting issues like rural development.
- Aid is essential to the rapid reduction of poverty, especially in the poorest countries. The key decision is not about where to target aid – it should always seek out the poor – but rather about how to deploy aid in different kinds of environment, including the war-torn and in failed states.
- In failed states and poorly performing countries, development, relief and security assistance need to find ways to work together, whilst still respecting the principles of humanitarian intervention, especially impartiality and neutrality. The most difficult countries to work in need renewed political commitment and multiple and carefully coordinated interventions.
- The Monterrey commitment to increased aid is a good starting point, but further commitments will be needed. All developed countries should commit to a specific date for reaching 0.7%.
- Debt relief is appropriate in some countries, but should not be at the expense of aid to other poor countries, some of which have managed to keep debt low. The focus needs to be more on the total volume of resources reaching poor countries, less on the modality of distribution.
- Setting up global and other special funds does little to increase the total volume of aid. They therefore have little value-added.
- Furthermore, they distort expenditure, make national ownership of budgets more difficult, and increase the transactions costs of providing development assistance. Earmarking is wrong, and global and other special funds make it worse.
- Transactions costs would be greatly reduced (and the Rome principles on harmonisation made much easier to achieve) if there were fewer bilateral donors and if more money was channelled through multilateral agencies. However, governance reform should be a pre-condition of any more money going to the World Bank; and, in any case, the UN should take a greater share in order to encourage competition in the system.
- If the budget processes of developing country governments are to predominate, and if those governments are to be accountable to their electorates, most, if not all aid should eventually be delivered through budget support.
- Donor countries need to strengthen their partnerships with developing countries, and in a way which encourages predictability, mutual accountability and reciprocal obligations (for example on aid volume).
- Rich countries should set more demanding targets for market access and the reduction of subsidy distortions; and developing countries should also phase in the liberalisation of trade between themselves.
Source: Maxwell, S, ‘The Washington Consensus is Dead! Long Live the Meta-Narrative’, Working Paper 243, ODI, London January 2005