IED Home Assignment 2

BIRLA INSTITUTE OF TECHNOLOGY & SCIENCE, PILANI

ECON F313: ISSUES IN ECONOMIC DEVELOPMENT
Tutorial Class (10 August 2019)

Aniket Upadhyay
2017B3A71005P
Submitted on 19th Aug 2019

A Review on Professor Pual Collier’s talk at LSE

Helping the Bottom Billion
Around the world right now, one billion people are trapped in poor or failing countries. Are we
optimistic about them ? How could we help them?
Professor provides a perfect recipe for helping those bottom Billion and ultimately helping every
human of the future of the economic disaster they so surely face, and the recipe is simple, it just
requires to be implemented, WE ALL NEED TO GET SERIOUS AND COMPASSIONATE
AGAIN !!!

WHY?

The bottom billion : STILL Falling Behind and

Falling Apart
The Bottom Billion have been suffering
over time. For forty years the development
challenge has been a rich world of one billion
people facing a poor world of five billion
people. Of these five billion people, 80 percent
live in countries which are developing and the
remaining billion people are the actual
challenge for development who are falling
apart and falling behind. These Billion people
belong to economies which have been
stagnant for 40 years, the countries whose
GDP per capita growth rate is constantly low
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as compared to significantly developing and the developed nations as a result of which, this gap
increases with time, increasing the gap between the standards of living and diverging from the
rest of mankind. The Bottom Billion still faces misery and suffers as they strive against civil war,
poverty, plague, ignorance,etc.
All societies used to be poor. Most are now lifting out of it. Why are others stuck? Because of
traps, although poverty itself is not a trap. These countries aren’t able to converge and remain
poor because of some other traps like the conflict trap, the natural resource trap, the trap of
being landlocked with bad neighbours and the trap of bad governance. In a more formal sense,
Paul talks, in the video and his book, about these four distinct traps that the developing nations
are trapped. These are:

1. The Conflict Trap - 73% of those in the

poorest billion of the world’s population
are either involved in or recovering
from civil war. In the fight against
poverty, civil war creates a vicious
circle – war causes poverty, and low
income contributes to tension. Low
growth means high unemployment and
thus plenty of angry young men ready
to fight. Conflict then destroys
infrastructure and scares away
investors, leaving even fewer
opportunities.

2. The Natural Resource Trap - Societies at the bottom are frequently in resource-rich
poverty. In the presence of large surpluses from natural resources autocracies produce
much more growth than do democracies. When there is plenty of money, leaders tend to
embezzle funds, spend on large, pet projects and buy votes through contracts. The
corrupt win the elections. In the end the natural resource becomes a curse and not a
blessing.

3. Nations landlocked with bad neighbours - A third trap is geographical – the problem of
being landlocked with bad neighbours.development. Being landlocked doesn’t have to
be a disaster, as long as your neighbours have decent infrastructure and allow you to
use their ports.All countries benefit from the growth of their neighbours but
resource-scarce landlocked countries must depend on their neighbours for growth.
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4. Bad Governance in a small country - terrible governance

and policies can destroy an economy with alarming speed.
Governance matters, conditional upon opportunities.
Differences in opportunities can make a big difference.
Where governments do not function, or exist only to benefit
themselves, development is ultimately impossible.

These traps are inescapable but today even if a country breaks free of these traps, they
face another problem that the global markets are now far more hostile to new entrants than it
was in the 1980s, which makes it more than impossible for these countries to converge, hence
needing the help of developed countries to break these barriers.

Paul Collier in his book ‘The Bottom Billion’ identifies 58 countries in the group of diverging
countries, including most countries in sub-Saharan Africa, as well as Bolivia, Cambodia, Haiti,
Laos, Myanmar and Yemen, and much of land locked Central Asia. The population of the group
together numbers almost one billion. It is projected to increase by 33% between 2017 and 2030
and to reach 1.9 billion persons in 2050. This problem matters, and not just to the billion people
who are living and dying in fourteenth-century conditions. It matters to us. The twenty first-
century world of material comfort, global travel, and economic interdependence will become
increasingly vulnerable to these large islands of chaos. And only 7 donor countries met the
Official Development Assistance target of giving 0.15% of their GNI to LDCs in 2016. That is
down from 9 in 2013. Five of them exceeded 0.20 per cent of their GNI.
The developed countries need to buckle up to help these diverging economies converge out of
compassion, humanity and enlightened self-interest else within another 40 years with global
social integration, this world would be a disaster.

What can needs to be done ?

How can we give credible hope to these 1 Billion People?

Economist Paul Collier lays out a bold, compassionate plan for closing the gap between
the rich and poor. He suggests that developed countries need to help these countries with a
feeling and an alliance of Compassion and enlightened self-interest to reach the goal of
achieving a complete converging economy. Compassion because these people live in societies
that don’t give them credible hope and enlightened self–interest so that our children after 40
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years live in a better socially integrated world. Compassion brings about the need for helping
these billion and enlightened self –interest brings the seriousness to our thought.
As a perfect guide and example of how a developed country last time got serious to help a
developed country, Collier gives reference to the 1940’s when the United States of America
helped the post-war Britain. The help wasn’t just out of compassion but out of fear that Britain
may also ally with Soviet Union in the cold war going between USA and USSR. So, out of
self-interest USA helped in the development of Britain.

● USA provided Britain with the Marshall aid.

● It reversed its trade policy. First, It had been trade protectionist but after this, it opened
its economy for Britain to trade and through General Agreement of Tariffs and Trade.
● Changed its security policy from isolationist to posting 100,000 soldiers in Britain for 40
years.
● Resolved the idea of National Sovereignty from not accepting being part of the league of
nations to itself forming the United Nations, the Organisation for Economic Cooperation
and Development, the International Monetary Front and encouraged the formation of
European Community for mutual Government Support.

So, Collier suggested that helping the divergent economies catch up would include policies
relating to Aid, Trade, Security and Governance as the basic elements to uplift the Bottom
Billion but as the country changes the internal details of the policies changes according to
conditions.

Regaining Convergence : Governance and

Commodity Booms
Collier discussed majorly about how good governance and government structure can
help the diverging economies in development. Many of these Bottom Billion countries get the
opportunity of commodity booms, partly because the commodity prices are high and rest
because of new discoveries for example, Uganda recently discovered oil in the most
disastrous locations of earth, Ghana has discovered oil and Guinea has a huge exploitation of
iron ore coming up. The resource flow from the commodity boom in the bottom billion is
precedent. This a source of optimism and transformational development for the bottom billion
which can be achieved only with good governance.
According to a research by Collier, most of the countries in the past 40 years which experienced
commodity booms experienced an immense boom everything goes up, rise in the GDP through
high priced exports in the short run but in the long run historically societies decline to the point
that they would have been better off if they would have experienced no booms at all, for
example like Nigeria which was better off if it never had oil. This is a consequence of growth in
increase of prices. The critical issue is the initial level of economic governance when the
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resource boom accrues. On the first hand, if a country has a good level of economic governance
boom would never take place, GDP will
increase a bit in the short run and will
gradually increase more in the long run
which is the case with Australia, Canada
and Norway. There’s a threshold level of
governance above which the governance
is considered as good governance,
governance of Poland in 1980’s has been
taken as that threshold.
A change in Governance came after the
booms of 1970’s and that was the spread
of democracy.

Democracy could’ve been a way for the bottom billion to catch-up but research suggests that
democracy makes the resource booms even worse than autocracy. But, there are 2 distinct
aspects in the democracy:

● There’s electoral competition (-) that determines how democracy comes to power, and
● There’s checks and balances (+) that determine how those in power controls the nation

The electoral competition component is the one which has adverse effects on the economy
boom. Usually, Political parties compete for votes by means of patronage if they so choose, and
in the context of ethnic loyalties and the absence of a free press, this is the most cost- effective
means of attracting votes. In many societies, patronage politics might be a more cost-effective
use of public money to attract votes than the provision of public services, yet it is too expensive
to be feasible. Obviously, a key difference between using resource revenues to supply public
services and using them to supply private patronage is that patronage breaks all the rules of
how public resources should be managed. To finance patronage, the government needs to
embezzle public money and resources out of the budget.
Strong checks and balances or political restraints helps out the technology boom in the long run.
For instance, If there are effective checks and balances on power, the society is saved from
patronage politics even though, were they given the chance, political parties would be driven by
electoral competition to play that game. Seventeen possible checks and balances can be
incorporated into a political system—an independent judiciary, an independent press, etc.
The big billion countries got instant democracy with electoral competitions without strong check
and balances and hence could not make of the opportunity of commodity booms.
For example Norway plays it well not only in good growth but also political game. Political
restraints are promoted by a higher level of per capita income. Economic development gradually
induces and leads to healthy institutional change. Norway is leading its normal development not
because of any special restraints but just because of its rules are complementary to its
development .
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It is this that creates the possibility of a political development trap. A low-income, resource-
rich society(like many of African countries) that either is an ethnically diverse autocracy or
acquires the instant democracy of electoral competition without checks and balances is likely to
misuse its opportunities in ways that make it fail to grow. Here Democracy is not as a boon as
we would expect, as Paul Collier says,” Democracy is more significant and sadly in very
negative sense”. This in turn closes off the path that most societies have taken to building a
balanced form of democracy, namely, through economic development.

Solution through Strong Checks & Balances -

Aid, Military intervention, legislation and
Agreements
Collier proposed a solution that we should have some international standards that
should be voluntary that would spell out the key decision points which should be taken in case
of a resource boom to harness these resource revenues. These international standards will be
tested and then implemented.
The content of these international standards would include for instance in case of oil or mineral
extraction

● how would the resources be extracted from the ground?

● with whom the rights of commodity extraction lie?

In a poor governance a rich company may make a deal with a minister at lower prices corrupting
the minister which is deteriorating for the country.
Collier suggests a solution to this is an institutional technology ‘Verified Auctions’ wherein the
profits will be higher. For example the British Treasury decided to sell the rights to the third
generation Mobile Phones and valued those rights to be 2 Billion Pounds but when they
conducted an auction they got 20 Billion Pounds.

For example the Extractive Industries Transparency Initiative which is a global standard for the
good governance of oil, gas and mineral resources. It was first launched in September 2002 by
the then UK Prime Minister, Tony Blair during the World Summit on Sustainable Development in
Johannesburg, following years of academic debate, as well as lobbying by civil societies and
companies, on the management of government revenues from the extractive industries. In
particular, the EITI was established to be an answer to public discussions on the “Resource
Curse” or the “Paradox of Plenty”.It seeks to address the key governance issues in the
extractive sectors. The EITI Standard requires information along the extractive industry value
chain from the point of extraction, to how the revenue makes its way through the government
and its contribution to the economy. This includes how licenses and contracts are allocated and
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registered, who the beneficial owners of those operations are, what the fiscal and legal
arrangements are, how much is produced, how much is paid, where the revenue is allocated,
and its contributions to the economy, including employment.

Then the question arises since the cost of developing international standards is zero and those
could transform the lives of Billion then why don’t we have them?
The answer is simple that the citizens of these economies don’t have the required knowledge
andhencethepoliticiansjustgetawaywithgestureswhichseemsasifthey’vedonesomething for the
country which looks good but is not effective.
So, Collier suggests that we need a critical mass of informed citizenry that would force the
politicians to inculcate in their policies international standards which overall will increase the
level of governance over the threshold level that will control the resource boom opportunity in
any of the Bottom Billion country that has a commodity surge, helping the diverging economy
catching up which could change the world.

Hence, summarising

As Countries at the bottom of the development scale have not only failed to
grow; they have actually regressed. They are caught in one or more of four major
traps that lock them in poverty.

2 integral forces which are required to change the world for good are the
alliance of compassion and enlightened self-interest.
The traps are: “The Conflict Trap,” “The Natural Resource Trap,” “Landlocked
with Bad Neighbours” and “Bad Governance in a small country.”
.
The problems of the bottom billion are global problems, because they result
in migration, terrorism and other phenomena of great concern to richer
countries, thus this Global concern must be acknowledged no later. We thus visit
back to the first question asked by Paul in the video -
How can we give credible hope to these 1B people, to humanity’s future, to our
future ?

~ Aniket Upadhyay
2017B3A71005P
19th Aug 2019

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