“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’)
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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 TRAP
73% 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.
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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 TRAP
Around 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
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Having money is no good unless it is spent well
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Democracy does not increase the likelihood of good
governance ( think of the patronage politics previously
discussed)
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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
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
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As corrupt officials take hold all the good people leave and
there is little push for change
AID
Over 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?
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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
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Aid worsens trade barriers and therefore is best when accompanied
by trade liberalisation.
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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