The Bottom Billion
Book Author | |
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Published | April 27, 2007 |
Pages | 205 |
Why the Poorest Countries Are Failing and What Can Be Done About It
What’s it about?
The Bottom Billion (2007) focuses on the specific problems of the 50 poorest states in the world and the traps that keep them impoverished. These states are drastically behind even developing nations and are in serious need of help from wealthier nations if they are to ever achieve economic self-determination. Drawing on his original research, Collier points out the pitfalls of the conventional methods for dealing with this extreme poverty and offers unique policy recommendations that cater to the unique struggles faced by the world’s poorest nations.
About the author
Paul Collier, formerly Director of Development Research at the World Bank, is Professor of Economics and Director of the Centre for the Study of African Economies at Oxford Universities and author of Wars, Guns, and Votes: Democracy in Dangerous Places.
Basic Key Ideas
When watching the news, we are often met with shocking images of extreme desperation and poverty from the world’s poorest countries. We are also left wondering why they are so poor. Is it the result of conflict, corruption or lack of industry?
While all these factors contribute to poverty, in reality the key ingredient to continual poverty is in fact poverty itself. The effects poverty has on a country, such as government corruption or poor infrastructure, make economic growth more difficult, and this lack of growth subsequently makes the country poorer. This vicious cycle is known as cyclical poverty, and economic stagnation is both its cause and effect.
War demonstrates this concept perfectly. Economic stagnation can imbue a population with desperation and hopelessness, both of which make it easier for the military or rebels to recruit, and thereby for megalomaniacs to wage war and squander resources. As an effect, war itself reduces economic growth by a factor of 2.3 percent per year, intensifying the economic stagnation that helped to fuel war in the first place.
So what measures can a country take to get itself out of cyclical poverty?
Essentially, it needs to find a way to achieve growth. Only through economic growth can the absolute poorest nations attack the roots of poverty itself: economic stagnation and the desperation that accompanies it.
But how can these nations spur economic growth? Firstly, they need to attract foreign money in the form of aid or imports. Secondly, this money needs to be directed not at the symptoms of poverty but at areas that accelerate economic growth, such as transportation infrastructure (roads and ports) or industrial development.
We often hear the term “developing world” used to describe all countries that are not part of the international elite such as the United States or Western Europe.
Yet, this simplistic way of thinking obscures the huge differences between the poverty faced by developing nations and the poverty of the very poorest nations.
In fact, the world’s poorest are considerably worse off than the other developing countries. For example, the average life expectancy in developing countries is 67 years, while in the poorest regions it is a mere 50. Likewise, a staggering 36 percent of the population of extremely poor nations suffer long-term malnutrition, compared to 20 percent in the rest of the developing world.
The primary reason for this disparity is that the poorest nations simply aren’t developing. With each passing year, this lack of development causes the wealth gap between the poorest nations and the rest of the world to widen.
One major reason for this is that many of the poorest nations have already “missed the globalization boat.”
In the past, developing nations like China and India were able to enjoy high-speed industrialization and an influx of capital as wealthier nations looked for cheaper manufacturing options. However, the world’s poorest nations were left behind during this wave of globalization, and have not been able to catch up since.
As this gap widens, the potential for the poorest nations to catch up becomes ever harder.
This is because when industrialized countries trade with each other, they share access to technological innovations, allowing them all to constantly improve their economic potential. The poorest countries, however, can’t do this, since they often have very little industry. So as the rest of the world continues to grow and develop, the poorest countries are effectively standing still.
Nothing wreaks more havoc on a country’s economy than war. The sheer cost of violent conflict – a staggering $64 billion on average – and the accompanying humanitarian crises that affect the entire region make war an extremely costly undertaking.
And unfortunately for the world’s poorest countries, they are far more likely to experience such ongoing, costly conflict than wealthier nations. In fact, an extremely poor country stands a depressing 1/6 chance of falling into a conflict over a five-year period.
This is due to the strong correlation between poverty, growth and war.
Conflict is often caused by economic stagnation. This is because economic stagnation hurts income, which leads to civil unrest and a desperate population. Unfortunately, the wars brought by poverty wreck the economy further, which in turn reproduces the conditions for more conflict.
It is because of this depressing cycle of bloodshed that poor countries that have just gone through a conflict have little better than a 50 percent chance of maintaining peace during the first decade.
One reason why such unending conflict is so damaging to the economies of poorer nations is the fact that violent conflict disrupts all legitimate means of producing revenue. In order to support war, all means of production are commandeered for military concerns, and this prevents goods from seeing it to market, thus further harming growth.
For example, during times of war, food commodities are either donated by or stolen from farmers who would otherwise have taken those goods to market and thus helped the nation’s economic growth – a growth that is necessary to lifting an embattled country out of the cycle of violence. War’s disastrous effects on economic growth keep the poorest nations poor.
Although we might intuitively think that additional revenue, especially from a much in-demand resource such as oil or diamonds, could only help a country to achieve economic self-determination, the reality is considerably more complicated – not to mention depressing.
In fact, discovering high-value natural resources can actually damage a country, both economically and politically.
The discovery of natural resources can affect a poor country’s economy through a phenomenon known as Dutch disease. Dutch disease occurs when the high demand for a country’s newly discovered resource hurts its other exports.
For example, say a country discovers a huge diamond deposit, which it then mines and sells on the international market. As buyers clamor to gain access to this resource, more and more foreign money flows into their economy, making their currency more expensive and causing higher prices.
This kills their economy, because less sought-after exports are unable to stay competitive on the international market due to their now higher prices. While this country might be experiencing amazing revenues from mining diamonds, the wider economy will be stagnant.
Receiving huge amounts of revenue from natural resources damages more than just the economy; this wealth can also end up enhancing the power of corrupt politicians.
In governments without sufficient transparency, these excess revenues provide money for private patronage, whereby aspiring – and corrupt – politicians bribe citizens or opinion leaders in order to achieve power.
Once these corrupt politicians achieve power, they are then free to create a system that favors them.
The poorest nations often have little budgetary transparency, meaning that it is easy for corrupt politicians to divert funds into the hands of a few. Once this culture of corruption has been established, it can infect the entire system, moving away from the stealing of commodity revenues to other sectors, such as the arms industry or construction.
In this global marketplace, economies are closely connected to each other, and the success of one country flows over the borders of its neighbors. This is especially true for landlocked countries; for example, if a country’s growth increases by 1 percent, then on average its landlocked neighbors’ economies grow by 0.7 percent.
These, however, are global statistics; they don’t reflect the realities for the world’s poorest nations. These nations enjoy only a 0.2 percent growth for every 1 percent gained by their neighbors.
Why do poor landlocked nations appear to be at such a disadvantage here?
One reason is that poor landlocked countries with little industry are extremely reliant upon their neighbors’ transportation infrastructure. Moreover, their neighbors have little to offer in terms of functioning transport corridors, because they too are often suffering from extreme poverty. Other nations that have access to the sea cannot easily provide goods to landlocked nations whose neighbors have poor roads, which therefore increases shipping costs and slows growth.
Because of their reliance on the success of their often poor neighbors, strategies for overcoming poverty are limited for landlocked nations.
One possibility is to lobby for aid for their neighbors in order to improve the transport corridors to their own country. This would therefore lower the cost of transporting goods in and out of the country, granting them greater access to the global market and helping to stimulate growth.
Another possibility is to avoid being “air-locked” by developing high-quality airports. This would allow them to circumvent the transport infrastructures of their dysfunctional neighbors’ entirely, thus giving them greater access to the global market by making it easier to import goods.
While being landlocked does not doom a nation to poverty, it offers no advantages and ties the fate of a nation to the fates of its neighbors.
Systems of checks and balances, governmental transparency and fair elections are standards for functioning democracies, partly because they put limits on the ways government corruption can affect societies.
But in some societies, these checks and balances do not exist – and the opportunity for government corruption is very high.
This incentive for corruption in countries with minimal or dysfunctional government is especially high where there is also extreme poverty. One reason for this is that, in these countries, minimal governmental transparency is combined with unchecked access to high resource revenues or large amounts of international aid. Corruption is therefore relatively easy and profitable in these countries.
A great example of such a country is Chad, a country with poor checks on government and where scrutiny of public finances in minimal. In 2004, only 1 percent of money released by the Ministry of Finance actually made it to the rural aid clinics for which the money was allocated. The wastefulness in this case is simply too extreme to chalk up to typical bureaucratic inefficiency – the money was clearly stolen.
Unfortunately, it is very difficult to break the cycle of corruption once it has begun. Even when informed citizens want to enact change, it is an uphill battle. Politicians entrenched in corruption have little to gain from reform, and thus have little incentive to campaign for it. This is because they directly benefit from deficient government; for them, reform is simply a salary cut.
This is also reflected in statistics. The longer a leader has been in charge in a failing state, the less likely the country is to make an economic turnaround. The reasoning here seems almost obvious:
Why kill the goose that lays the golden egg?
Money that is given by wealthier governments to poorer nations, with the aim to ease economic or humanitarian crises, is called financial aid. It is the largest form of assistance for the world’s poorest nations.
However, despite its popularity, it is not always the best way to transfer wealth from wealthy to poor countries.
This is partly because of where the aid is distributed. In the poorest nations, there is often a lack of government transparency, and sometimes there is even a complete lack of government. This means that the aid doesn’t always make it into the hands of those who need it most; it is either stolen or put to another, less humanitarian use.
For example, it is estimated that, on average, 40 percent of the total military budget of Africa – the continent that receives the most aid by far – is inadvertently funded by aid. Unfortunately, that money, once handed over, is impossible to recoup.
This isn’t to say that aid is necessarily bad – it’s just that it must be very precisely delivered.
One way to ensure that aid makes it to its intended destination is to bypass corrupt or inept government altogether.
For example, we could do this by using aid to fund an independent service authority: an internationally run organization that, through aid, provides government services such as education and medical care, and helps to develop infrastructure, without being accountable to a corrupt government.
Such independent service authorities would be composed of an international group of technical specialists and would be completely open to public scrutiny. This means that the independent service authority would be competent, unbiased and trustworthy. It could therefore serve as a benchmark for how proper government should function once the country in crisis no longer requires such intensive aid. Knowing this, citizens could hold future government accountable to such guidelines.
The reason for deploying international peacekeeping forces is not necessarily to defeat an opposing army; the mere presence of a committed foreign military could help to bring peace by preventing conflict from resuming.
This is because foreign militaries act as an independent and neutral source of power, which makes warring parties think twice about reinitiating violence.
One way that foreign forces help the peace process is by limiting the power of domestic armies. Often, the domestic military is the strongest power in post-conflict or failing states, and they can sometimes use this power to undermine legitimate government or even attempt a coup d’etat. The presence of foreign forces can prevent the domestic military from trying this.
The presence of a foreign military can also keep governments from inadvertently sabotaging the peace process.
For example, often after the end of a civil conflict there is an uneasy truce between government and rebels. Both sides expect the other to break the truce, and the government tries desperately to replenish its forces and prepare them for future conflicts. The mixture of high tensions and renewed military might is a recipe for disaster that can send post-conflict nations spiraling into a cycle of violence.
However, since the presence of committed foreign militaries acts as a protection against coups and rebellion, reform nations can allocate funds towards projects that help to stabilize and rebuild the nation rather than spending them on rebuilding the military.
But these strategies only work when the foreign military is willing to stand up to demagogues. Take, for example, the French Ivory Coast, where French forces didn’t want to draw blood and allowed a coup to succeed simply because the coup’s leader promised to hold elections. Unsurprisingly, he ended up being an autocrat. This situation could have been prevented had the French military simply intervened.
Because the wealthy Western nations tend to be the most economically powerful, they are the ones who establish the norms that the rest of the world must adhere to in order to trade with them.
This immense power gives wealthy countries the opportunity to play a decisive role helping the poorest regions to rise out of poverty.
One way that wealthier countries may do this is to use international charters. These are a collection of rules that govern trade. These charters could be focused in a way that encourages positive changes in the governance of poorer nations.
For example, wealthier nations could establish an international charter for natural resource revenues, which would aim to alleviate the problems associated with the discovery of natural resources. They could order member nations to only allow companies to mine their resources if they have won a bid through a free and open tender invitation. This should reduce corruption and the waste of resource revenues.
However, just because an international charter exists doesn’t mean that anyone wants to adhere to it. In fact, charters are sometimes met with great resistance from corrupt politicians.
To combat this, countries that adhere to charters could receive preferential treatment over those that don’t.
For example, joining the European Union provides a nation with huge benefits such as a huge free market. Yet in order to join the European Union and benefit from membership, countries must adhere to certain agreed-upon norms, like democratic and accountable government. Not adhering to these rules forces a nation to remain outside the gates of this prosperous community.
Furthermore, Non-Governmental Organisations (NGOs), which are active in many nations, can use adherence to norms as prerequisites for receiving aid. If countries want the aid, then they must adhere to international norms in order to get it.
These norms, when used in conjunction with other tools for development, are powerful weapons against poverty.
The main message in this book:
The world’s poorest population – the one billion people trapped in economic turmoil – are at risk of being permanently left behind in terms of development. Economic stagnation, coupled with specific economic “traps,” cause the disparity of wealth between the world’s poorest countries and developing countries to widen.
The Western world has the tools to combat this extreme poverty, but it must seriously rethink its strategies if it is to help the world’s poorest countries reach economic self-determination.
Actionable ideas from this book in blinks
Before you choose to donate to an aid agency, research and understand their goals. Do their goals contribute to economic growth, or do they merely treat the symptoms of economic stagnation?
Campaign for initiatives that aim to increase awareness about the importance of growth. Campaigns for food and medicine are easy to sell because they are so easy to empathize with, but ensuring economic growth is just as important in the war against poverty.
Take into account how aid is spent in the countries you intend to donate to. Does the money actually reach its intended destination? If not, perhaps consider donating to a different agency.
SECOND REVIEW FROM SHORTFORM
About Book
About one billion people around the globe live in persistent poverty—in countries where the economy is constantly struggling and incomes are stagnant or shrinking. In The Bottom Billion, British economist Paul Collier argues that traditional economic theories and development aid programs have paid too little attention to these countries,” instead focusing on emerging markets that don’t require help from the West to grow.
The “bottom billion” are stuck in “poverty traps,” and will stay stuck, unless governments, aid agencies, international organizations, and private charities work together to craft policies to help them overcome these traps.
In this guide, we’ll explore Collier’s four traps and his four remedies, compare his views to those of other economists and policymakers, and examine how conditions for the bottom billion have changed since the book’s publication.
About one billion people around the globe live in persistent poverty—in countries where the economy is constantly struggling and incomes are stagnant or shrinking. In The Bottom Billion, British economist Paul Collier argues that traditional economic theories and development aid programs have paid too little attention to these countries, instead focusing on emerging markets that don’t require help from the West to grow.
Collier, who has devoted his career to the study of underdeveloped economies, says only a select group of the poorest nations need outside help, because they are stuck in “poverty traps” that make economic growth especially hard. This group—which Collier refers to as the bottom billion—needs to be the focus of development efforts. They are stuck, and will stay stuck, unless we help them. By we, Collier means governments, aid agencies, international organizations, and private charities, which must work together to craft policies to help the poorest overcome these traps.
(Shortform note: Collier identifies 58 nations that fall into the category of “the bottom billion.” To avoid “naming and shaming,” he doesn’t provide a comprehensive list. However, he does refer to this group as “Africa+” because most of the countries that make up the bottom billion are in sub-Saharan Africa. Nations like Haiti, Afghanistan, and Yemen also fit into this category.)
Collier stresses that speed is paramount. The longer we wait to help, the harder it will become for the poorest nations to overcome their poverty traps. This is because as the bottom billion stagnates, everyone else continues to grow. This causes an ever greater divergence between the two groups and puts the poor nations at a competitive disadvantage in a globalized economy.
Collier argues that this divergence is already happening. Taken together, middle-income emerging countries (like China and India, for example) grew by an average of:
- 2.5% a year during the 1970s
- 4% a year during the 1980s-1990s
- 4.5% a year during the early 2000s
On the other hand, the poorest nations’ incomes:
- Rose by 0.5% a year in the 1970s
- Declined by 0.4% a year in the 1980s
- Declined by 0.5% a year in the 1990s
Therefore, this group of already poor nations was poorer in 2000 than it was in 1970.
Collier’s reason for helping the bottom billion is simple: 200 years after the Industrial Revolution, the West is developed, and it now has the ability to speed up the process for everyone else. Collier argues that doing so can lift millions of people out of poverty, and it can insure the West against spillover effects of the violence, disease, and dysfunction that poverty often causes.
Who Is Paul Collier?
Sir Paul Collier has spent his academic career focused on economic development, with a specialty in the study of civil war, foreign aid, and democracy in Africa. From 1998 to 2003, he was director of the World Bank’s Development Research department. In 2003, he and his colleagues published a World Bank report called Breaking the Conflict Trap, a 242-page report analyzing the causes and consequences of civil war. This report is the basis of many of Collier’s arguments in The Bottom Billion.
Currently, Collier is a professor of economics at St. Antony’s College and director of the Centre of African Economies at Oxford. In 2014, Collier received a knighthood for his contributions to understanding and promoting positive change in Africa.
How Has GDP Growth Changed for the Poor in the 21st Century?
Evidence suggests that the conditions of the bottom billion have taken a turn for the better since The Bottom Billion was published in 2007. Although Collier doesn’t name the 58 nations that comprise his “bottom billion,” the United Nations has a similar category: Least Developed Countries (LDCs). As of 2020, there were 47 LDCs, with a combined population of 1.06 billion people, slightly above the 980 million people among Collier’s group of 58 nations in 2007.
From 2000 to 2020, the LDCs had an average annual GDP per capita growth rate of 2.5%. This was significantly higher than the growth rates Collier calculated for the bottom billion from 1980-2000, which hovered around negative 0.5%. In 2000, these nations had GDP per capita of $331. As of 2020, it had grown to $1,054.
In contrast, the middle-income countries had an average annual GDP per capita growth rate of just below 4.2% from 2000 to 2020. So, middle-income countries are still growing faster than the bottom billion. However, incomes among the LDCs have shifted from shrinking in 1970-2000 to increasing modestly since 2000. Many scholars attribute the 21st-century successes to the Millennium Development Goals.
Four Kinds of Poverty Traps
Collier identifies four distinct “traps” that afflict the bottom billion, locking them into poverty with little chance of escaping on their own: the conflict trap, the natural resource trap, being landlocked, and poor governance. Later in the guide, we’ll explain how each factor exacerbates poverty, making them harder to overcome.
(Shortform note: Collier borrows the term “poverty trap” from fellow development economist Jeffrey Sachs, who initially used the term while referring to the “trap” of endemic diseases like malaria.)
Collier says all nations of the bottom billion suffer from at least one of these traps, while many deal with a combination of the four. Seventy percent of those suffering from these traps are in Africa, which is why Collier urges the West to place its focus there.
Collier thinks it’s a mistake to focus on emerging, middle-income economies like China and India. Unlike countries in the bottom billion, both of these nations have achieved sustained growth and aren’t stuck in an economic rut. When aid agencies like the World Bank and International Monetary Fund (IMF) take a more expansive view of the global poor, Collier says this only diverts resources from the poorest nations that need it most.
Reaction to Collier’s Work
When The Bottom Billion was published in 2007, it was regarded by many to be a middle ground between two earlier books from prominent development economists: Jeffrey Sachs’ The End of Poverty, which testified to the virtues of foreign aid, and William Easterly’s The White Man’s Burden, which was deeply critical of the efficacy of aid and the institutions that distribute it.
The Economist said The Bottom Billion was filled with “statistical nuggets and common sense” and was due to become a classic. A review in The Guardian praised it for getting past the slogans and cliches that dominate most discussions of global poverty. Collier was also praised for his brevity and humor in conveying the dense material on which his findings are based.
One of the most vocal critics of The Bottom Billion was William Easterly, who, in a lengthy op-ed, accused Collier of the “correlation-as-causation” fallacy because his analysis of conflict failed to test a well-specified hypothesis. Easterly also argued that because all rich nations were poor at one time, this doesn’t mean that the 58 nations Collier chose will stay poor unless the West intervenes. Collier acknowledges that Western nations grew on their own, but he believes the West can and must expedite the process for the current poor.
Part 1: Four Poverty Traps
Trap #1: The Conflict Trap
The first of Collier’s poverty traps is conflict. Specifically, Collier focuses on civil wars and coups d’etat, which affect (or have recently affected) about 70% of the bottom billion, causing dramatic harm. Aside from the human costs, this violence reduces economic growth, scares off potential investors, and causes people (and their money) to flee. To Collier, reducing the prevalence of conflict is essential to elevating the bottom billion out of poverty.
Causes of Conflict
Collier and his researchers designed a model to uncover the causes of conflict in developing nations. Among others, they measured variables like income, growth rates, income inequality, and ethnic composition to determine which factors increased the likelihood of conflict. In their analysis, they distinguished between civil wars and coups d’etat: For conflicts that lead to civil war, they discovered three main culprits: low income, slow growth, and natural resource dependence; for coups, Collier found that low income and stagnant growth are also the main predictors of government overthrow.
1. Low income: For a given nation, if current income is doubled, the risk of civil war is cut in half.
(Shortform note: For example, the Central African Republic currently has GDP per capita of $493. If this were to be raised to $986, the country would be half as likely to fall into civil war, according to Collier’s model.)
2. Slow growth, or economic decline: Each percentage point of GDP reduction increases civil war risk by a percentage point.
(Shortform note: While economic growth may reduce the likelihood of war, it can’t prevent it altogether. Ethiopia is currently engulfed in civil war in its Tigray region, despite sustained growth rates of more than 6% annually since 2004.)
3. Natural resource dependence: The more a nation depends on revenue from natural resources, the greater the threat of civil war. Collier suggests that this is because rebels are more likely to take the risk of war to get their hands on the glut of natural resource money.
(Shortform note: Research by UCLA Professor Michal Ross cites natural resources—particularly oil and minerals—as having a key role in ”triggering, prolonging, and financing” civil wars.)
Collier’s findings contradict what many policymakers assume leads to civil war: income inequality, political repression, and a colonial legacy. Collier found these factors didn’t affect the likelihood of civil war one way or the other.
Ethnic diversity is another often-mentioned potential cause of conflict. But Collier found an increased risk of conflict only in societies with one ethnic group large enough to form a majority. This majority could oppress smaller groups through majority rule, leading to tension and eventual war.
(Shortform note: The Rwandan Civil War of 1990-1994 is a well-known example of conflict influenced by ethnic strife. The Hutu majority marginalized the Tutsi minority, which eventually took up arms against the government, leading to civil war.)
Collier’s Methodology Criticized
Most of Collier’s ideas on conflict come from a 2003 report he wrote for the World Bank called Breaking the Conflict Trap. Although the report has influenced policymakers at the World Bank and elsewhere, some scholars have criticized its methodology. Laurie Nathan of the London School of Economics published a paper titled “The Causes of Civil War: The False Logic of Collier and Hoeffler,” in which he accuses Collier of empirical mistakes that cast doubt on the validity of his conclusions about both the causes of war and the best strategies to prevent violence. For example, Nathan criticizes Collier for treating all civil wars the same rather than considering their variable intensity and scope, and for neglecting to consider the social and political factors that led to the conflicts.
Trap #2: The Natural Resource Trap
While the conflict trap might be expected, there is a more counterintuitive trap for the bottom billion: the natural resource trap. This trap afflicts nations whose primary revenue comes from selling natural resources like oil, diamonds, or precious metals. According to Collier, reliance on lucrative natural resources harms poor nations in three ways: “Dutch disease,” volatile prices, and the corruption of democracy.
Dutch Disease
Natural resource exports often harm economic growth considerably, due to a phenomenon economists call “Dutch disease.” When a nation discovers a large amount of a natural resource like oil or natural gas (as the Netherlands did in the 1950s, hence the name) and exporting it dominates their economy, this sets off a series of economic consequences that usually leads to more harm than good. Here’s the typical process, using oil as an example.
- A nation discovers, and starts exporting, large amounts of oil.
- Foreign nations buy the oil, causing an inflow of foreign currency.
- The country’s own currency rises in value relative to foreign currencies, because it’s now relatively scarce and foreign currency is abundant.
- Exports produced within the nation (like textiles, for example) become unprofitable. This is because their production costs are paid in domestic currency, and are now more expensive, while their revenue is in foreign currency, which is now relatively cheap.
(Shortform note: The natural resource (in this example, oil) is largely immune from Dutch disease, because the costs of resource extraction are much cheaper than the production of other exportable products.)
Collier argues that the best way for poor nations to grow rapidly is to improve productivity in labor-intensive exports. For example, China exports textiles and electronics, India provides customer service to the West, and both have attained sustained economic growth as a result. Natural resource exports, on the other hand, undercut this method of development the most.
Many Countries Have Suffered From Dutch Disease
Dutch disease has afflicted many nations—for example, England in the 1970s and Venezuela in the 2010s, both from oil discoveries. Recently, many African nations have discovered oil, and now face the same dilemma of Dutch disease.
The term “Dutch disease” was coined by The Economist and is a reference to the economic woes that plagued the Netherlands following its discovery of natural gas deposits in the North Sea in 1959. When the Netherlands began exporting their natural gas and exports soared, so did the value of the Dutch guilder. This led to other exports becoming uncompetitive and caused a sharp rise in unemployment and a decline in capital investment.
Volatile Prices and Bad Budgeting
In addition to creating “Dutch disease,” natural resource wealth harms economies when prices are volatile and governments make bad budgetary decisions. Collier explains that when oil prices are high, government revenue is high. This usually leads to big increases in government spending.
However, when prices drop precipitously (as often happens with oil), governments are loath to make corresponding budget cuts. Collier says that when they do, they usually cut the wrong things. For example, it’s much easier to cut the budget for schools than to downsize the newly built presidential palace.
Volatile Prices in Venezuela
Venezuela’s experience in the past decade illustrates Collier’s observation that when commodity prices plummet in countries with bad fiscal and monetary policy, chaos ensues.
Oil accounts for about 95% of Venezuela’s exports and about 12% of its total GDP. When the price of crude oil was well above $130 a barrel in the early 2000s, the socialist government spent extravagantly on a host of social programs. When oil prices dropped, government revenue dried up.
Rather than letting the country’s exchange rate shift to accommodate the dip in oil prices, President Nicolas Maduro chose to ration imports. To cover its deficits, the government printed more money. Both strategies failed. The rationing has led to a shortage of food, medical supplies, and other basic necessities. Printing money to pay off debts has led to hyperinflation.
According to the International Monetary Fund (IMF), inflation in Venezuela peaked in 2016 at more than 65,000% (for comparison, the US Federal Reserve usually aims for inflation around 2%). In 2017, more than 10% of the population fled the country.
Collier warned in The Bottom Billion that Venezuela was benefiting from high oil prices now, but would be in for a rude awakening when prices dropped—his prediction proved correct.
Corrupting Democracy
In addition to Dutch disease and bad budgeting, Collier also believes that an influx of revenue from natural resources corrupts the democratic process in the poorest democracies, leading to economic harm. Collier thinks this happens for two reasons:
- Shortsightedness: In poor democracies, leaders are focused on the short-term goal of winning the next election, which leads to irresponsible spending. On the other hand, autocracies with a firm grip on power are free to make longer-term investments with payoffs down the road.
- Patronage politics: Leaders find the most cost-effective way to win elections. Poor nations flush with resource revenue are prone to money-driven political corruption, such as bribery, buying votes, and intimidation, because they don’t have the checks and balances of developed democracies.
How Important Is Democracy?
While Collier doesn’t advocate autocracy, he sees democracy as uniquely susceptible to the natural resource trap. His view that democracy incentivizes corruption and shortsighted budgeting decisions is at odds with that of many scholars, who view democracy as an indispensable part of a free society.
In Development as Freedom, Harvard economist and Nobel Laureate Amartya Sen argues that critically poor nations need more democracy, which is valuable for its own sake. Giving poor people a voice in how they’re governed enriches their lives.
Sen also argues that democracy acts as an important bulwark against some forms of political mismanagement. He highlights the fact that no democracy, however poor, has suffered a famine. This, in Sen’s view, is because even corrupt politicians have an incentive to avert such catastrophes, if only to keep their jobs.
Where Collier and Sen agree is that functioning democracy requires more than simple access to the ballot box. Checks and balances, including a free press and independent judiciary, are vital to preventing patronage politics.
Trap #3: Being Landlocked
Collier’s third trap for poor nations is being landlocked. In Collier’s view, geography makes a big difference in economic performance. Nations that are surrounded on all sides by other nations and lack access to waterways are at a significant economic disadvantage because trade routes are largely out of their control.
Higher Transport Costs
Collier cites research by economist Jeffrey Sachs, who found that being landlocked reduces a nation’s GDP by about half a percentage point. Because so much trade occurs through seaports and other waterways, countries lacking direct access to these routes pay more to get their goods to global markets.
Impact of Neighboring Countries
Landlocked countries are also dependent on the economic policies of their neighbors, which Collier says can be a positive or a negative. Research suggests that if a landlocked country’s neighbors grow by an additional 1%, it grows by an additional 0.7%, due to spillover effects. For example, landlocked Switzerland has benefited from the growth of neighboring countries France and Germany, because higher incomes in these countries are often spent on Swiss imports.
In Africa, however, most countries are landlocked and suffer the negative spillover effects of their low-growth neighbors.
Strategies for the Landlocked
Collier has identified nine strategies that can help mitigate the disadvantage of being landlocked. We’ve grouped them into two categories: Be kind to your neighbors, and be inviting to outsiders.
Be Kind to Your Neighbors
Landlocked countries can help their neighbors grow by working together on transport infrastructure, which affects all parties in the region. Reducing regional trade barriers can also facilitate growth.
Be Inviting to Outsiders
For the bottom billion, cultivating an environment for Western partnerships is crucial. Collier names four ways to attract help from global partners:
- Set superior policy. For example, Lebanon became a financial hub for the Middle East because of its pro-business posture.
- Take advantage of exports via airplane freight and e-commerce opportunities by setting proper regulatory policy. This can help compensate for lack of access to bridges and seaports.
- Be a good investment. Violence, corruption, and instability scare off would-be benefactors like the World Bank and IMF. Curbing these forces can entice loans and financial aid.
- Encourage remittances (expatriates sending money back to their native country) by making cross-border banking easier.
Helping the Landlocked: The Vienna Programme of Action
Since publication of The Bottom Billion, the United Nations has launched an initiative to assist landlocked nations in facing their unique challenges. The Vienna Programme of Action for Landlocked Countries (VPoA) is a decade-long program initiated in 2014 to help the 32 nations classified as landlocked.
The program helps facilitate transport agreements between landlocked nations and with neighbors who have access to the sea, expanding opportunities for trade and reducing transit costs.
It has also encouraged another one of Collier’s proposals by emphasizing growth in Information and Communication Technology (ICT). As a result, Armenia’s ICT sector, for example, grew by 38% in 2017.
Becoming Landlocked: The Colonial Partitioning of Africa
The seemingly arbitrary national boundaries that make economic and political development in modern Africa difficult can be traced back more than a century.
In the late 1800s, European powers discovered the potential of Africa as a reservoir of natural resources that could be used to fuel the Industrial Revolution. In what became known as “The Scramble for Africa,” these nations competed for territorial claims to the continent. This mad dash culminated in the Berlin Conference of 1884, where 13 European nations and the United States met to divide up Africa.
The result was a set of national boundaries with scant regard for the African people or their tribal, linguistic, and cultural divisions. Most of the boundaries drawn at the Berlin Conference lasted through the era of colonialism and independence and are still in effect today. These national divisions form a persistent problem that is largely unique to Africa. 16 African countries are landlocked, by far the most of any continent.
Trap #4: Poor Governance and Failed States
As the final trap, Collier identifies poor governance as a problem that reinforces poverty and low growth. Incompetent government hinders economic growth or even leads to ruin.
Corruption
Due to corruption, many of the poorest countries in the world have leaders who are among the richest people in the world. For example, the daughter of Angola’s president is a billionaire despite the fact that half of Angolans earn less than $2 a day.
(Shortform note: According to Transparency International’s Corruption Perception Index, the three most corrupt nations are South Sudan, Syria, and Somalia. Together, they have an average GDP per capita income of just $964.)
The Mix of Petrodollars and Corruption
In Crude World: The Violent Twilight of Oil, journalist Peter Maass examines the interplay of oil money and corrupt governments in a handful of countries, including the tiny African nation of Equatorial Guinea. His findings reveal how brazen much of the malfeasance is.
In 1994, Equatorial Guinea had a GDP per capita of $210. But following its discovery of oil reserves in the mid-1990s, GDP per capita ballooned to nearly $23,000 by 2008. Nearly all of the new wealth went straight into government coffers, however, and very little reached regular citizens. As of 2006, 75% of the country still lived in poverty.
So, what did Equatorial Guinea’s leaders buy with the windfall? Federal prosecutors in America have some clues. In 2014, the US Justice Department reached a settlement agreement with the son of Equatorial Guinea’s president, Teodoro Obiang, relating to more than $30 million of embezzled assets. Per the agreement, the US government seized a Malibu mansion, a Ferrari, and a collection of Michael Jackson memorabilia. In return, Obiang was allowed to keep suspicious assets outside of the US, including a private jet and one of Jackson’s diamond-encrusted white gloves.
This kind of lavish spending is common among oil-exporting countries like Russia, Saudi Arabia, and Nigeria.
Why Change Is So Hard
Collier notes that many good people try their best to achieve reform, but are often overpowered by vested interests. For example, in the bottom billion nations, dictators often replace honest civil servants with people who are willing to do their personal bidding. Collier argues that this is why the bottom billion need outside assistance.
75% of the bottom billion live in nations that have at some point been categorized as a failing state.
(Shortform note: Collier neglects to define “failing state,” except to say that they scored extremely low for at least four straight years on a Brookings Institute index that ranks 20 components of governance and policy.)
Attempts at Reform in Kenya
In It’s Our Turn to Eat, journalist Michela Wrong recounts the efforts of Kenya’s former anti-corruption czar John Githongo to clean up malfeasance in the African nation. The story illuminates the price that many reformers pay for trying to fight corruption in their home countries.
In Kenya, corruption runs deep. The average citizen pays 16 bribes a month to government officials—the price of doing business in a bottom billion country. To turn things around, Githongo set his sights on Anglo Leasing and Finance Company LLC, which received 16% of the Kenyan government’s expenses. As it turned out, Anglo Leasing was a shell company used to line the pockets of government officials and their cronies. For his efforts to expose this corruption, Githongo was forced into exile in Britain. In Kenya and many other bottom billion countries, whistle-blowing is considered an act of treason.
The power of vested interests and the status quo substantially reduce the probability of failed states correcting course. According to Collier’s statistical analysis, the likelihood of a failed state having a sustained turnaround in a given year is only 1.6%. The average failing state stays in this category for 59 years.
(Shortform note: Although building better institutions is difficult, it is more feasible than changing a nation’s geography or culture. While overturning the status quo in failed states rarely happens, Why Nations Fail provides a blueprint for the institutional design that allows nations to develop. The authors argue that “inclusive institutions” are what separates economic development in rich and poor countries.)
Part 2: Remedies for the Bottom Billion
Having explained the four factors that trap the bottom billion in poverty, Collier then discusses four remedies he believes the West and poor nations can apply to break those poverty traps: foreign aid, military intervention, laws and charters, and trade policies.
(Shortform note: Collier doesn’t emphasize political reforms as strongly as other scholars. He also believes in refocusing on economic growth, rather than on more “photogenic” social priorities like holding elections and increasing school enrollment.)
Remedy #1: Foreign Aid
The first remedy Collier examines is foreign aid, which he argues can be useful to spurring growth among bottom billion economies under the right circumstances. Among poor nations, Collier estimates that foreign aid adds about a percentage point to annual GDP. For many nations, receiving foreign aid in any amount prevents their living standards from getting worse. However, Collier believes that aid can go further when it’s used intentionally.
In Collier’s view, most traditional approaches to foreign aid focus on a “one size fits all” strategy of providing aid to all extremely poor nations. Collier believes this strategy fails to consider how foreign aid interacts differently with each poverty trap. He tailors his foreign aid strategy to account for the disparate impact these traps have on the effectiveness of the aid. In this section, we’ll explain the traditional approaches of using foreign aid, then explain how Collier’s approach would differ.
Aid and Conflict
Traditional approach: Collier’s own analysis suggests roughly 11% of traditional foreign aid winds up funding the recipient country’s military, and that 40% of Africa’s total military budget comes from aid. Collier says that foreign aid does not increase the chance of civil war, but it does slightly increase the risk of a coup in conflict-prone countries—presumably because the foreign aid boosts the government revenue that bad actors want to appropriate.
Collier’s approach: Collier argues that aid to conflict-prone regions needs to be disbursed with caution. Aid earmarked for specific projects or aid in the form of technical assistance may be more appropriate for conflict-prone countries.
(Shortform note: Other experts argue that foreign aid can prevent conflict by strengthening security and defense, stabilizing the government, and creating bonds between donor and recipient countries.)
Does Foreign Aid Fund Terrorism?
A 2018 investigation revealed that foreign aid dispensed by the United Nations has wound up in the hands of the terrorist group al-Shabaab. According to the investigation, the terrorists use taxation and extortion to gain control of cash cards distributed to displaced people in Somalia.
For example, terrorists control many roads and checkpoints and charge a toll to travelers who have received foreign assistance. The terrorists also operate a protection racket, charging businesses and aid groups to assure their safety. While stories like this do occur, Collier stresses that most foreign aid does go to people in need.
Aid and Natural Resources
Traditional approach: Collier finds that aid isn’t very useful for nations that have an abundance of natural resources. In these places, aid acts similarly to revenue from resource rents (the difference between the price of a commodity and the average cost of producing it), and two things can happen: Bad decision makers waste the revenue, or they experience Dutch disease.
Collier’s approach: He argues that rather than receiving foreign aid, resource-rich nations are better off focusing on reforming laws and charters (which Collier discusses as his third poverty trap remedy) and crafting better trade policy.
(Shortform note: While Collier is highly skeptical of aid to oil-rich nations, there is some evidence of positive effects even in countries with large oil revenues. A UN working paper examines the beneficial effects of aid to Indonesia, which has achieved sustained economic growth despite its combination of oil and foreign aid.)
Aid for the Landlocked
Traditional approach: Because of the unique challenges they face, foreign aid is typically a big priority for landlocked nations. Collier agrees that foreign aid is vital to landlocked nations to increase consumption and improve basic living conditions.
Collier’s approach: To spur broader economic development, Collier urges these nations to use the aid on transportation infrastructure, which will help address landlocked nations’ difficulty accessing trade markets, in addition to humanitarian objectives.
(Shortform note: For example, landlocked Zambia is dependent on foreign aid for basic health care services. Although foreign aid to Zambia has yet to lift it out of its poverty traps, it has achieved some of the modest humanitarian successes Collier sees as crucial. Poverty rates are falling, fewer children have been stunted by malnutrition, and incidences of HIV have dropped by half since 2000.)
Aid and Bad GovernanceTraditional approach: Another failed strategy is aid that is contingent upon policy. To Collier, forcing countries to adopt policies they would otherwise reject usually fails. This is because aid “conditionality” is based on agreements, not follow-through.
Collier’s approach: Collier admits bad governance makes foreign aid largely ineffective. Therefore, he says foreign aid for the worst governments is unwise, and the West needs to focus on the other remedies (laws and charters and trade policy).
While Collier doesn’t support forced policy changes as a condition of aid, he does advocate “governance conditionality,” which links aid to achieved improvements in governance.
Collier suggests a strategy for when poorly governed states show improvement:
- Provide technical assistance (trained foreigners with expertise) as soon as there are signs of reform.
- Provide monetary assistance once recipients are better governed and better equipped to use it properly. Providing monetary aid too soon is a mistake, because it’s often misused during government transitions.
(Shortform note: A 2018 research paper argues that any negative effects of aid on quality of governance have been exaggerated, and that donors can take steps to minimize negative effects, such as providing resources for budget support.)
US Contribution to Foreign Aid
Collier argues that foreign aid is misunderstood in the West both by average citizens and many policy makers, muddying the waters around the debate about increasing or decreasing the aid budget.
Polls show that Americans vastly overestimate the amount the US spends on foreign aid, with many people believing it constitutes around 25% of the federal budget. When asked how much they’d like it to be, those polled said around 10%. As it turns out, foreign aid accounts for only around 1% of the federal budget, indicating much of the American public would support increasing the budget if they knew its current size.
Most rich nations have pledged to commit around 0.7% of GDP to foreign aid, but only a handful of countries meet or exceed this commitment. About 0.2% of US GDP goes to foreign aid, which ranks near the bottom among OECD nations, although the total amount ($39.2 billion in 2019) ranks first.
Remedy #2: Military Intervention
Next, Collier argues that military intervention is an important tool for Western governments to prevent violence in susceptible nations. Although these interventions are controversial, Collier argues that when done properly, the benefits substantially outweigh the costs. When Western nations dismiss the option entirely, the results can be catastrophic.
Collier says military interventions serve three functions:
- Restoring order
- Keeping the peace
- Insuring against coups
Restoring Order
According to Collier, Western governments have an obligation to intervene in failing states lacking a functioning government. There is, of course, a risk to Western troops tasked with restoring order. However, Collier believes the costs of not intervening are far greater, both to the bottom billion, who languish in disorder, and to Western nations that face the repercussions of terrorism and epidemics that arise from the chaos.
Collier highlights Somalia, a case where a sustained military intervention would have worked well. Instead, the American military intervened in 1993 when the government collapsed, but then withdrew after negative public reaction to 18 American casualties. By 1995, there were 300,000 Somali casualties. When Collier’s book was published in 2007, Somalia was still without a functioning government. Additionally, Somali refugees have gone on to commit acts of terror in the West.
Mission Creep in Somalia
While Collier says that pulling out of Somalia was a mistake, many consider the events in Somalia a case of mission creep—the tendency of military leaders to keep broadening the scope of their mandate.
In 1992, President George H.W. Bush sent 28,000 troops into Somalia to help feed starving children. Then, a group of them stayed as part of a UN peacekeeping initiative. Given the success of these objectives, the US military took on the task of trying to chase down the warlord Mohamed Farah Aideed. The mission culminated in two American helicopters being shot down, and the failure prompted President Clinton to withdraw troops from Somalia.
Collier argues that this decision led to later inaction in response to atrocities.
Keeping the Peace
In addition to restoring order, Collier believes Western military forces acting as peacekeepers can reduce the likelihood of violent relapse following a civil war. These are situations in which Collier contends that foreign governments and their citizens welcome military intervention. For example, British forces intervened in Sierra Leone when rebels took UN workers hostage. With only a few hundred troops, Britain was able to disband the rebel group.
(Shortform note: British troops intervened in Sierra Leone in 2000, when rebels rejected a peace agreement and threatened Sierra Leone’s capital. They were able to repel the insurgency, and stayed for two years to oversee the democratic transition that occurred in May 2002.)
Insurance Against Coups
Militaries can also intervene when the threats of coups arise. Collier proposes Western governments work in alliance with the African Union to make this practical. The African Union could supply legitimacy to the interventions, and the West could provide the manpower. As things are now, European governments with troops stationed in unstable regions often step aside and let coups happen, for fear of overstepping their authority. Collier acknowledges that following the US war in Iraq, there is little appetite for military interventions. But in these three capacities, he believes they can be helpful.
Critics Question the Effectiveness of Military Intervention
William Easterly believes military intervention is unlikely to act as insurance against coups (as Collier argues) because coups often happen too quickly for the West to be able to respond. He also considers it misguided for Collier to assume that deploying troops to Rwanda, for example, would have prevented the atrocities that occurred. Finally, Easterly says people in poor nations grow skeptical of foreign aid when it’s combined with a military component, and they may see it as a pretext for occupation.
Other scholars argue that interventions in Africa to thwart terrorism have failed. They contend that military operations that result in civilian casualties only fuel extremist groups, as does Western support of oppressive governments.
Remedy #3: Laws and Charters
Collier argues that his third remedy—changes to laws and international norms—is the most cost-effective way to help the bottom billion. Both laws and charters can improve growth by requiring or incentivizing poor nations’ governments to be more ethical and transparent.
Western Laws
Collier says Western nations can change their own banking laws and regulations to reduce bottom billion corruption in two ways:
First, they can require reporting of suspicious or corrupt transactions from abroad to authorities. The West already does this with transactions tied to terrorism. It can expand to include corrupt bottom-billion money.
Second, they can enforce the laws against bribing foreign officials, which have usually been overlooked.
(Shortform note: Only in 1997 did the Organisation for Economic Co-operation and Development (OECD) require its member nations to make bribing a foreign official illegal. In fact, Western contractors are notorious for bribing foreign governments to secure contracts.)
International Charters
International charters can help economic growth by providing a roadmap for proper conduct and prudent policy. While they’re not enforceable by law, Collier argues charters use peer pressure to improve behavior. Collier identifies five areas where establishing norms via international charters, or voluntary pacts among nations, can be effective.
Natural resource revenues: This might include competitive bidding for contracts, transparency in spending funds, and spreading some of the risks of price shocks to companies rather than governments through negotiated contracts and insurance policies.
Democratic norms: Collier suggests emphasizing a free press, since this has been shown to substantially reduce government waste, fraud, and abuse.
Budget transparency: Publishing how government revenue is spent, and the results of those expenditures, is crucial to accountability.
Peacekeeping: This charter would lay out standards for international security efforts and foreign aid.
Investment: A charter on investment would make rules for adjudicating disputes between governments and investors, as well as include a mechanism for investor insurance.
Amnesty International on Fighting Corruption
Amnesty International, an organization devoted to exposing and fighting corruption, has an annual Corruption Perceptions Index, which ranks countries on their levels of corruption. Unsurprisingly, the worst performers on the index are mostly bottom billion nations.
Similar to Collier’s idea of voluntary charters, Amnesty International advocates for “Integrity Pacts” to improve transparency and accountability. Contractors, bidders, and a third-party watchdog sign the pact to adhere to specified standards in the procurement process.
Additionally, Amnesty International has devised a set of strategies for cracking down on the West’s complicity in paying bribes to secure government contracts:
Develop protections for whistleblowers and public registers that reveal the owners of foreign assets.
Strengthen criminal liability for companies committing bribery.
Ensure transparency in foreign bribery settlements, and compensate the victims.
Remedy #4: Trade Policy
Collier believes trade policy can be a helpful tool in alleviating poverty. As they’re designed now, though, Collier is critical of both rich country and poor country trade policies, arguing they both hurt the bottom billion by stifling competition, rewarding inefficient businesses, and making exports more difficult. He explains how various well-intentioned policies backfire.
Rich Country Trade Policies
When rich nations subsidize their own farmers (as the US does with cotton and sugar, for example), Collier says this pushes out farmers in poor countries whose livelihoods rely on producing and exporting these crops. Also, when processed materials suffer higher tariffs than raw materials, poor farmers are discouraged from processing their exports (which would increase their revenues).
Subsidizing American Farmers
The US government has been subsidizing American farmers since the Great Depression and the Dust Bowl of the 1930s. Today, federal aid to farmers consists of direct payments, crop insurance, and loans. Proponents of these policies argue that they protect farmers from price swings and natural disasters, and allow America to grow its own food rather than relying on imports.
Critics argue that transfers go mainly to wealthy farmers and that subsidizing production encourages an increase in supply, which leads to lower prices and more subsidies for farmers. In 2000, more than 40% of net farm income came from government payments, a peak since the programs were implemented.
Collier and others argue that the West would be better off repealing these subsidies and forcing domestic farmers to compete for themselves. The bottom billion could benefit from producing crops, and consumers in the West would pay lower prices.
Collier argues that the “fair trade” practice of companies paying more than market value for their raw materials to help poor farmers backfires, too. This practice (which is equivalent to a charitable transfer), encourages farmers to keep farming low-priced crops rather than pursuing more lucrative options. The combination of subsidizing domestic farmers while also subsidizing bottom billion farmers is a contradiction, and Collier says poor farmers are better off with neither policy.
Starbucks and FairTrade
Collier disagrees with organizations like FairTrade International, which operates a labeling initiative that certifies that products have met a set of social, economic, and environmental standards. Collier believes that well-intentioned efforts like these usually backfire. Although specific FairTrade standards vary by commodity, most have a series of similar requirements, some of which include:
A Fair Trade premium: Buyers pay a specified percentage above the market price, called the “community development premium” or “social premium,” which is meant to be used for investments in local communities.
Standards for working conditions: Child labor is usually prohibited, and workers are free to unionize.
Environmental standards: The use of some chemicals is prohibited, and producers must provide summaries of the environmental impact of their production.
The purpose of fair trade is to improve the living conditions of poor farmers. Proponents argue it provides farmers with stability from price shocks and prevents large corporations from exploiting poor farmers in developing countries. However, Collier and other critics argue that fair trade is merely charity that keeps farmers producing the crops that “have locked them into poverty,” and prevents them from making the difficult but necessary business decisions that would enable them to become more profitable on their own.
Bottom Billion Trade Policies
Poor nations also hurt themselves through imprudent trade policies, like tariffs of their own and regional trade agreements. According to Collier, while trade barriers in poor countries are harmful enough on their own, they are even more dangerous when combined with foreign aid. When people use foreign aid (which is paid in foreign currency) to buy imports (which are purchased in foreign currency), the aid triggers Dutch disease as tariffs artificially raise import prices.
Regional trade pacts modeled on the European Union are largely futile as well, Collier says, because most poor African nations are too similar to benefit much from trade with one another. The EU model worked because of the differences among trading partners: some were rich and had high demand for manufactured goods, and some were poorer and had low labor costs in manufacturing. The rich received low-cost goods, and the poor received higher wages. As Collier points out, a collection of low-income, stagnant African economies only makes a larger low-income, stagnant economy.
Africa’s Newest Free Trade Agreement
In 2018, 54 African nations ratified the African Continental Free Trade Agreement (AfCFTA). The trading bloc, if fully implemented, would be the largest of its kind. Although Collier was critical of regional trade agreements in his book, he said in a 2018 interview that the AfCFTA was a “very important step forward” because it would enlarge markets for the smallest African states.
The World Bank predicts the AfCFTA can lift 30 million people out of extreme poverty, and would improve incomes of 68 million additional Africans. The agreement would also cause incomes of both skilled and unskilled workers to rise, and lead to wage gains for women of more than 10%.
Although regional trade agreements between a few small nations may be rather ineffectual, this continent-wide bloc may be large enough to provide the kind of diversity Collier argues is necessary for all of its members to benefit. While having great potential, scholars argue that the AfCFTA’s success will still hinge on the policies and regulations that are implemented and enforced.
Trade That Works
Collier advocates two main priorities in trade:
- Lowering tariffs and other barriers between rich nations and poor nations.
- Protecting the bottom billion against China.
He says sub-Saharan Africa needs protection from Chinese competition to offset China’s agglomeration advantage. Collier suggests keeping the West’s tariffs on China as is, and eliminating those placed on African nations.
(Shortform note: The recent US tariffs imposed on Chinese goods may inadvertently help the bottom billion by giving them the relative advantage to American markets that Collier advocates.) Collier says the bottom billion are uniquely positioned to achieve economic growth through exports. Evidence shows African markets alone are too small to foster the competition necessary to increase productivity. Diversifying exports provides larger markets and is shown to increase economic growth.
(Shortform note: Because so many poor nations specialize in one or a few commodities, they are susceptible to price shocks that can rapidly reduce incomes. Research indicates that export diversification helps economic growth by protecting against these price fluctuations.)