“Development”

Training Session 13 Feb 2015

What is the developing world?• For many years the term “developing world” has been used

as a catch all term for everything outside the liberal west (e.g. about 5 billion people)

• No longer really a useful grouping given the vast differences between China and Sudan, for example.

• Lots of the traditionally developing world are growing at quicker rates than developed countries and are moving steadily towards (or have already achieved) middle income status (think China, India and Botswana)

• The rest of the developing world is stagnant or growing backwards economically (think Sudan, the Central African Republic and Haiti)

A brief snapshot of affairs in the bottom billion

• Almost half of the world love on less than $2.50 US a day

• The poorest 40% of the world’s population accounts for 5% of global income

• 1.1 billion people have inadequate access to clean water• Half of the worlds children (1 billion of 2.2 billion) live

in poverty• 1.6 billion people live without electricity• Nearly a billion people remain unable to sign their name

In this training session…

1. Explanations for the economic failure of the bottom billion (based on Paul Collier’s ‘The Bottom Billion’)– The Conflict Trap– The Natural Resource Trap– The Landlocked with Bad Neighbours Trap– The Bad Governance in Small Countries Trap

2. Discussion of the potential solutions to these traps and the best development models (based on Collier, Dambisa Moyo, Sachs etc.)

THE CONFLICT TRAP73% of people in the bottom billion have recently been through a civil war or are currently in one.

The Conflict Trap• There is an increased likelihood of conflict in

the bottom billion– The three factors that most influence the likelihood

of civil war are the starting income of a country, the growth rate of a country and its degree of reliance of natural resource exports

– To quantify the impact• If you are to halve the starting income of a country you

will double the risk of civil war• For each % point you add to the growth rate of a country

you will knock the equivalent % off the risk of conflict

The Conflict Trap• A low income combined with low growth rates

amount to poverty and hopelessness in a population.– A lack of hope for a better future typically affects

young uneducated males most, which also happens to be the main target for rebel group recruits

• Low income and low growth contribute to a weak state– A weak state is easier to attack and therefore makes

rebel movements and coups more likely to both be launched and to be successful

The Conflict Trap• Dependence on natural resources also

contributes to the likelihood of conflict– In the fist instance natural resources are the easiest

way to finance a rebellion (Kabila in the Congo, rebels in Nigeria and Sierra Leone)

–Moreover huge natural resource incomes increase the pay off of control

The Conflict Trap• Some counterintuitive facts to keep in mind– Ethnic divides: some of the most ethnically diverse

countries are the most peaceful, and countries with ethnic purity (Somalia) are conflict ridden.

– Social and Political rights: often assume in West that rebellion happens over lack of democracy. Civil war just as likely in democratic poor countries as autocratic poor countries.

– Geography: does have an effect (mountains more likely to have rebellion), still less important than the economic reasons.

The Conflict Trap• Further weakens the economic situation in a country

(Collier estimates that a civil war has on average a cost of $64 billion to the country and it’s neighbours)

• Most of the costs occur in the aftermath of fighting (disease and displacement)

• 90% of all countries with civil wars have recommenced conflict in the first decade following the war

• Creates a legacy of killing which both makes people more inclined to violence and also creates resentment.

THE NATURAL RESOURCE TRAP

29% of the bottom billion live in countries whose economies are dominated by natural resource exports

The Natural Resource Trap• As previously stated, natural resources contribute to

the conflict trap, however they are also a trap in and of themselves – even in peace time countries with natural resources are unlikely to grow.

• The phenomenon is most often explained by “Dutch Disease”– Huge natural resource exports drive up the value of a

country’s currency and in doing so make all other exports uncompetitive.

– For example, in the 70’s oil boom the oil revenue coming into Nigeria sky rocketed and as a result all other exports (Cocoa and Peanuts) became uncompetitive.

The Natural Resource Trap• Another aspect of this is the “Boom and Bust” nature

of commodity exports– There is significant instability in the global price of

commodities and as the price changes so does the entire income of the Government

– More often than not this money is managed poorly by bottom billion governments

– During periods of boom credit markets flow freely allowing governments to borrow huge amounts (inevitably the commodity reserves dry up and they are left with huge debt servings)

– Electorates find it difficult to hold governments accountable

The Natural Resource Trap• Commodity export reliance reduces the

likelihood of democracy• Also reduces the functionality of democracy– The politics of patronage is commonplace

throughout the bottom billion democracies and so increases in government cash flows serves to further entrench and extend patronage.• Where 20% of government income is resource based,

electoral competition actually lowers the rate of growth by 3% as compared to autocracy.

The Natural Resource Trap• Reduces likelihood if diversifying• Also increases the likelihood of conflict

THE LANDLOCKED WITH BAD NEIGHBOURS TRAPAround 1/5 of the worlds countries are landlocked

The Landlocked with Bad Neighbours Trap

• Landlocked countries are reliant on their neighbours for both transport corridors to enable trade and as direct trade markets.

• Collier suggest bleak prospects and that they will be reliant on aid forever.

• Can’t un-landlock yourself• Many of these countries are also in conflict

with their neighbours and have limited capacity to effect change in their economies

THE BAD GOVERNANCE IN SMALL COUNTRIES TRAP

The Bad Governance in Small Countries Trap

• Having money is no good unless it is spent well– In 2004 a study tracked money released by the Ministry if Finance in

Chad and found that only 1% of it actually reached its destination

• Democracy does not increase the likelihood of good governance ( think of the patronage politics previously discussed)– What does increase the likelihood id having a large population, having

a high proportion of secondary educated people

• The cost of failing states (to itself and its neighbours) is around $100 billion

• Poor governance is a trap– As corrupt officials take hold all the good people leave and there is

little push for change

AIDOver the past 30 years it has added around 1% point to the growth rate of the bottom billion.

What is aid?• It can either be a grant (European Commission) or a loan

(IMF)• It can be given to governments or to individual

communities (microfinance).• It can be given to governments as either budget support

(general cash injection) or earmarked for a particular project.

• It can be distributed through NGOs, government departments or international institutions.

• It can be given conditions ex ante (a government promising to institute changes following the aid) or ex post (a government that already has stronger policies).

Aid• Until now, at best aid has prevented total

collapse of many countries, rather than promoted growth.

• At the Gleneagles G8 summit in 2005 there was an agreement to double aid.

• Aid is subject to ‘diminishing returns’.• We already know huge budget support is

unlikely to work– Nigeria oil

Aid• The implication is the same for debt relief• Aid is notably more successful in countries with

good governance, which is fairly controversial as they are perceived to be the least in need.

• Relationship to military spending– 11% of aid is spent on military– In Africa 40% of all military spending is financed by aid

• Politicisation– Don’t give to worst off – your job is tied to doing well– World Bank

Aid • Conflict Trap– Some argue that it increases the pay off and

induces rebellion (Collier’s research does not support this but he acknowledges anecdotal evidence)

– Coups on the other hand are more likely in heavy aid environments

– On the other hand, if it works effectively it can increase income and kick start growth (which are important factors in the likelihood of conflict)

– Aid is particularly effective in post conflict context

Aid • Natural Resource Trap– Aid is useless (these places have enough money it

us just misused)

Aid • Landlocked– Need to be on aid for a long time– Need to be used to improve costal links and

bigger neighbouring markets (rather than organised country by country)

Aid • Bad Governance– As an incentive?– As skills?• Instituting good policies for you

– As reinforcement?– Prior to reform?

Aid • Many economists are very anti aid– Former IMF Chief Economist Raghuram Rajan

argues that it retards growth in the labour intensive export markets

– Dambisa Moyo “Dead Aid” (Closes out private investment)

– William Easterly “The White Man’s Burden” (Aid is the new colonisation)

TRADE

Trade• Rich countries must reduce protectionism – There is a serious issue with policy incoherence

in the western world: we continue to give large amounts of money in aid that is then undermined by our refusal to make any changes to trade policy

– We can take the hit, there are alternatives to cotton for American farmers, where there are not for cotton farmers in Chad.

Trade• Bottom billion countries must reduce

protectionism– Focusing on domestic markets is a non-starter –

there is insufficient local demand or money to create industry and jobs

– Provide a cover for government corruption

Trade• Bottom billion countries must reduce

protectionism– Focusing on domestic markets is a non-starter –

there is insufficient local demand or money to create industry and jobs

– Provides a cover for government corruption

Trade• Aid worsens trade barriers and therefore is best when accompanied

by trade liberalisation.– If a government wants to spend aid on schools and hospitals they have to

sell the foreign exchange to get local currency to spend.– People buy foreign exchange to pay for imports.– Aid is valuable only to the extent that people want to buy imports– If imports have incredibly high tariffs then the demand for foreign

exchange is low and you can’t really build schools and hospitals.– Other than through aid, foreign exchange is generated through exports – in

that way exports and aid are in competition (for foreign exchange)– As such more aid means less need for exports and can make exports less

profitable– Trade liberalisation increases the demand for imports (as they are now

cheaper) and in doing so increases the demand for foreign exchange and balances out the effect of aid.

Trade• Is ‘fair trade’ the solution?– The short answer is no.– At best it decreases export diversification as it

locks producer into producing fair trade goods.

• Is export diversification the solution?– First step to avoiding the natural resource trap

and avoiding boom and bust cycles.– In order to create a functioning export market in

manufacturing and agriculture, the bottom billion must be protected from competition in Asia

Trade• Should the bottom billion leave the WTO?– The WTO is premised on negotiating beneficial

trade liberalisation– Unfortunately Africa has very little to offer the

Western World and as such it has mostly been the loser in WTO negotiations