The "bottom billion" - Paul Collier

[Music] [Music] So, can we dare to be optimistic? Well, the thesis of the bottom billion is that a billion people have been stuck living in economies that have been stagnant for 40 years and hence diverging from the rest of mankind. And so the real question to pose is not can we be optimistic; it's how can we give credible hope to that billion people? That, to my mind, is the fundamental challenge now of development.

What I'm going to offer you is a recipe—a combination of the two forces that change the world for good—which is the alliance of compassion and enlightened self-interest. Compassion, because a billion people are living in societies that have not offered credible hope; that is a human tragedy. Enlightened self-interest, because if that economic divergence continues for another 40 years, combined with social integration globally, it will build a nightmare for our children.

We need compassion to get ourselves started, and enlightened self-interest to get ourselves serious. That's the alliance that changes the world. So what does it mean to get serious about providing hope for the bottom billion? What can we actually do? Well, a good guide is to think, what did we do last time the rich world got serious about developing another region of the world? That gives us, turns out, quite a good clue, except you have to go back quite a long time.

The last time the rich world got serious about developing another region was in the late 1940s. The rich world was you—America—and the region that needed to be developed was my world, Europe. That was post-war Europe. Why did America get serious? It wasn't just compassion for Europe, though there was that; it was you knew you had to, because in the late 1940s, country after country in Central Europe was falling into the Soviet block. And so you knew you'd no choice; Europe had to be dragged into economic development.

So what did you do last time you got serious? Well, yes, you had a big aid program—thank you very much—that was Marshall Aid. We need to do it again. Aid is part of the solution, but what else did you do? Well, you tore up your trade policy and totally reversed it. Before the war, America had been highly protectionist; after the war, you opened your markets to Europe. You dragged Europe into the then global economy, which was your economy, and you institutionalized that trade liberalization through founding the General Agreement on Tariffs and Trade.

So, total reversal of trade policy. Did you do anything else? Yes, you totally reversed your security policy. Before the war, your security policy had been isolationist; after the war, you tore that up. You put 100,000 troops in Europe for over 40 years. So, total reversal of security policy. Anything else? Yes, you tore up the 11th commandment: National sovereignty. Before the war, you treated national sovereignty as so sacred that you weren't even willing to join the League of Nations. After the war, you founded the United Nations; you founded the Organization for Economic Cooperation and Development; you founded the IMF.

You encouraged Europe to create the European Community—all systems for mutual governance support. That is still the waterfront of effective policies: aid, trade, security, governance. Of course, the details of policy are going to be different because the challenge is different—it's not rebuilding Europe, it's reversing the divergence of the bottom billion so that they actually catch up. Is that easier or harder? We need to be at least as serious as we were then.

Now, today I'm going to take just one of those four; I'm going to take the one that sounds the weakest, the one that's just motherhood and apple pie: governance. Mutual systems of support for governance. And I'm going to show you one idea in how we could do something to strengthen governance, and I'm going to show you that that is enormously important.

Now, the opportunity we're going to look to is a genuine basis for optimism about the bottom billion, and that is the commodity booms. The commodity booms are pumping unprecedented amounts of money into many, though not all, of the countries of the bottom billion. Partly they're pumping money in because commodity prices are high, but it's not just that—there's also a range of new discoveries. Uganda's just discovered oil in about the most disastrous location on Earth. Ghana's discovered oil. Guinea has got a huge new exploitation of iron ore coming out of the ground—so a mass of new discoveries. Between them, these new revenue flows dwarf aid.

Just to give you one example: Angola alone is getting $50 billion a year in oil revenue. The entire aid flows to the 60 countries of the bottom billion last year were $34 billion. So the flow of resources from the commodity booms to the bottom billion is without precedent. So there's the optimism. The question is how is it going to help their development? It's a huge opportunity for transformational development. Will it be taken?

So here comes a bit of science, and this is a bit of science I've done since the bottom billion, so it's new. I've looked to see what is the relationship between higher commodity prices of exports and the growth of commodity-exporting countries. I've looked globally; I've taken all the countries in the world for the last 40 years and looked to see what the relationship is. And the short run, say the first 5 to 7 years, is just great. In fact, it's hunky dory; everything goes up. Right? You get more money because your terms of trade have improved, but also that drives up output across the board. So GDP goes up a lot—fantastic! That's the short run.

And how about the long run? Come back 15 years later—well, in the short run, it's hunky dory, but then most societies historically have ended up worse than if they'd had no booms at all. That is not a forecast about how commodity prices go; it's a forecast of the consequences—the long-term consequences of growth from an increase in prices. So what goes wrong? Why is there this resource curse, as it's called?

And again I've looked at that, and it turns out that the critical issue is the level of governance—the initial level of economic governance when there are resource booms. In fact, if you've got good enough governance, there is no resource curse; you go up in the short term, and then you go up even more in the long term. That's Norway—the richest country in Europe. It's Australia; it's Canada. The resource curse is entirely confined to countries below a threshold of governance. They still go up in the short run—that's what we're seeing across the bottom billion at the moment— the best growth rates they've had ever.

And the question is whether the short run will persist with bad governance. Historically, over the last 40 years, it hasn't. It's countries like Nigeria that are worse off than if they never had oil. So there's a threshold level above which you go up in the long term and below which you go down. Just to benchmark that threshold, it's about the governance level of Portugal in the mid-1980s. So the question is, are the bottom billion above or below that threshold?

Now, there's one big change since the commodity booms of the 1970s, and that is the spread of democracy. So I thought, well maybe that is the thing which has transformed governance in the bottom billion. Maybe we can be more optimistic because of the spread of democracy. So I looked; democracy does have significant effects. Unfortunately, they're adverse—democracies make even more of a mess of these resource booms than autocracies.

At that stage, I just wanted to abandon the research, but it turns out that democracy is a little bit more complicated than that, because there are two distinct aspects of democracy. There's electoral competition, which determines how you acquire power, and there's checks and balances, which determine how you use power. It turns out that electoral competition is the thing that's doing the damage with democracy, where our strong checks and balances make resource booms good.

And so what the countries of the bottom billion need is very strong checks and balances. They haven't got them; they've got instant democracy in the 1990s—elections without checks and balances. How can we help improve governance and introduce checks and balances in all the societies of the bottom billion? There are intense struggles to do just that.

The simple proposal is that we should have some international standards, which would be voluntary, but which would spell out the key decision points that need to be taken in order to harness these resource revenues. We know these international standards work because we've already got one; it's called the Extractive Industries Transparency Initiative. That is the very simple idea that governments should report to their citizens what revenues they have.

No sooner was it proposed than reformers in Nigeria adopted it, pushed it, and published the revenues in the Nigerian newspaper; circulation spiked. People wanted to know what their government was getting in terms of revenue. So we know it works. What would the content be of these international standards? I can't go through all of them, but I'll give you an example.

The first is how to take the resources out of the ground—the economic process is taking the resources out of the ground and putting assets on top of the ground. The first step in that is selling the rights to resource extraction. You know how rights to resource extraction are being sold at the moment? How they've been sold over the last 40 years? A company flies in, does a deal with a minister, and that's great for the company; and it's quite often great for the minister, right? And it's not great for the country.

There's a very simple institutional technology which can transform that, and it's called verified auctions. The public agency with the greatest expertise on Earth is, of course, the Treasury. That is the British Treasury. The British Treasury decided that it would sell the rights to third-generation mobile phones by working out what those rights were worth. They worked out worth £2 billion. Just in time, a set of economists got there and said, "Why not try an auction? It'll reveal the value." It went for £2 billion through auction.

If the British Treasury can be out by a factor of 10, think what the Ministry of Finance in Sierra Leone is going to be like! When I put that to the President of Sierra Leone, the next day he asked the World Bank to send in a team to give expertise on how to conduct auctions. There are five such decision points; each one needs an international standard. If we could do it, we would change the world—we would be helping the reformers in these societies who are struggling for change.

That's our modest role; we cannot change these societies, but we can help the people in these societies who are struggling and usually failing, because the odds are so stacked against them. And yet we've not got these rules. If you think about it, the cost of promulgating international rules is zilch. Why on Earth are they not there? I realized that the reason they're not there is that until we have a critical mass of informed citizens in our own societies, politicians will get away with gestures.

Unless we have an informed society, what politicians do, especially in relation to Africa, are gestures—things that look good but don't work. And so I realized we had to go through the business of building an informed citizenry. That's why I broke all the professional rules of conduct for an economist, and I wrote an economics book that you could read on a beach.

However, I have to say the process of communication does not come naturally to me. This is why I'm on this stage, but it's alarming, right? I grew up in a culture of self-effacement. My wife showed me a blog comment on one of my last talks, and the blog comment said, "Kia is not charismatic, but his arguments are compelling."

[Applause] If you agree with that sentiment, and if you agree that we need a critical mass of informed citizenry, you will realize that I need you. Please become ambassadors!

[Applause] [Applause] You.