The Bottom Billion

            Paul Collier, the director of the Center for the Study of African Economics at Oxford, takes an unprecedented twist on the ‘white man’s burden’ in his book The Bottom Billion. He does not target the sentiments by rendering Africa hopeless and victimized, nor does he claim that their setbacks are simply their mistakes. He takes a nuanced approach: “change in the societies at the very bottom must come predominantly from within,” (xi) and industrial nations must strengthen their efforts. Collier holds the opinion of many other development specialists: aid agencies aren’t exactly doing their job. They are focusing on middle-income countries. For example, The World Bank doesn’t even have a single staff member in the Central African Republic, so they are neglecting those who actually need their help. The world has fallen into mayhem over the Chinese stealing intellectual property, but no one has heard of anyone entering crisis mode over Chad. The conception of the developing world is backdated a few decades, and, as Collier claims, the bottom five billion do not need our help. They are doing just fine; it is the bottom billion that are falling apart.

            Collier points to four traps that make the bottom billion the bottom billion. The first is the conflict trap; if a country has low per capita income, they are more likely to fall into civil war and “the lower a country’s income at the onset of conflict, the longer the conflict lasts” (26). Collier emphasizes a vicious cycle: if countries anticipate civil war, economic decline occurs, and once one civil war occurs, countries are much more vulnerable to future wars. The second trap Collier presents is the natural resource trap. Dependence on natural resources prevents a normal economy from forming and results in what Collier deems “survival of the fattest.” The natural resource trap is accentuated by being landlocked (trap number three), as many Sub-Saharan African countries are. Here we have another cycle. There is less inherent capability by living in the middle of a desert, so countries are doomed to rely on natural resources. The final trap is surprisingly given the same substance as the previous one: the trap of bad governance. When a country is not developed and receives aid, “government must transform its money into public services” (66); welcome to yet another vicious cycle.

            Well how do these cycles end? Many development specialists think Western countries determine the fate of the bottom billion, but Collier targets a different geographical area: Asia. While China is a hot debate topic in the 2012 election, Collier suggests it is those receiving austerity and toughness that are important to development. Asia benefited from an earlier boost of globalization. Now the rest have to wait “until development in Asia creates a wage gap…similar to the gap…between Asia and the rich world around 1980” (86).

            Don’t worry, Collier doesn’t say Asian price gaps are the answer. He goes on to explain how industrialized nations can change their current help mechanisms to actually work. Intuitive changes need to occur to fit countries in traps; conditionality must happen. He presents the time consistency problem, specifying an inherently broad concept. To prevent problems we must invest in projects. To turn around states, we must ensure political opportunity, and to sustain growth in post-conflict situations, we must provide long-term financial aid. Aid cannot be solitarily determined by quality of the government or reputation of the state. It must be time consistent.

            Collier presents the conception of laws and charters next, but they seem to go hand-in-hand with aid. Aid must ensure it will increase investment to indicate growth, so international charters need to be made for this reassurance. Collier specifies charters for different circumstances, but it can be put pretty simply: transparency. Transparent auction, payments, spending, and budgeting are necessary for charters to work. Investment charters must be a long-term commitment and apply to both domestic and foreign governments. The Westerners aren’t coming to the rescue any more; domestic governments must take responsibility. Collier emphasizes that “the whole point of an investment charter is for newly reforming governments” (155), so support must be given to rebels while still holding them accountable.

            Collier presents another cycle: trade policy. Rich countries have subsidies and escalated tariffs while undeveloped countries are protected. With liberalized trade, countries need to diversify their exports, which is made possible when using aid on import supply. To make this feasible, the bottom billion “need temporary protection from Asia” (167) to pay lower tariffs and generous rules of origin.

            All trapped countries will continue their struggle and each need to be catered to specifically by Collier’s varied solutions. Instead of the aid argument that is hyped up by many economists, Collier presents the concept of laws and charters to be more crucial. Nigeria or Angola cannot be forced to take aid and invest it well, but by presenting them with laws and charters, they will be given the groundwork for reform that is not subject entirely to neopatrimonial states.

            Collier’s emphasis on precedents set internationally, protection by Asia, and poignant references to individual country’s success and failures-“less than 1 percent of [money intended for rural health clinics in Chad] reached the clinics” (66)-creates an enticing and convicting read. He is informative yet unique in his approach, but his solutions raise a couple of hesitations. First, his solutions harp on how the G8 must reconsider aid strategies to help reformers, but then he switches to focus on Asia as the most important actor. The majority of his book focuses on the traps countries are in and the measures that need to be taken by Western, industrialized countries and the bottom billion themselves. However, towards the end he throws in that Asia is the place these countries need to turn to. If both are needed, Collier then becomes hypocritical. If the bottom billion need support from Eastern and Western hemispheres and they need international laws and charters, shouldn’t there be some between the US and Asia in the first place? Collier claims the bottom billion must be held accountable in their domestic and international spheres, but how can they be expected to do that if both domestic political parties are debating which one can be tougher on China? This has to do mostly with US-China relations, but if we don’t enter into cohesive charters with Asia, we cannot expect underdeveloped countries to do so. This being said, if Collier redefines the notion of rich countries from Europe and the US to include Asian markets (specifically the ones benefiting from globalization), his argument becomes much stronger. At the end of every section he states what his argument implies for the G8, but China isn’t in the G8 (Japan is the only Asian country). Once more of Asia is considered, the coordination of rich countries and aid agencies within themselves and between each other will have much larger implications. Collier is correct that reform must come from within, but unless reform is properly facilitated, and “we” is redefined to mean the West and Asia, their struggle will prove indefinite.

           

Collier, Paul. The Bottom Billion. New York: Oxford University Press, 2007. Print.

Well There Aren't Many Chinese In Africa

In reference to Professor Anderson’s talk, I was intrigued by the same points that Mark was regarding the width of borders and the effect of the percentage of Chinese population on growth. Borders do indeed disrupt markets, as Canada trades between provinces 22 times as much as it trades with the United States. With less distance to trade, there are fewer gaps in prices, creating what Professor Anderson called the “border effect.” I don’t doubt that this effect is evident, but we must account for other variables (which Professor Anderson did, but very briefly). He stated that economic size and free trade are also determinants, but he spent much more time on distance and the presence of borders. In Collier’s The Bottom Billion, he emphasizes the border effect as well, but a border is not the only prime factor that prevents trade.

In developed nations, the presence of borders takes precedent over many other factors, but in developing and third-world areas, even the rise of regional trading wouldn’t do much good. When all economies in surrounding areas are very small none can produce more than raw products (as manufactured products often have an extremely high tax), and many are landlocked, true global trade is needed.

Professor Anderson also claims that the number of people in the world living on $1.25 a day or less has decreased significantly; the poor must be better off. This comment made me pretty uneasy, as it is only a small fraction of the story. I am not an export on the topic in any sense, but I do know that globalization has benefited those in developed countries far more than those in Sub-Saharan Africa and South East Asia. While the number of people living on this amount of money has decreased, those that have jumped above this level have barely done so. However, those in developed countries have drastically increased their wealth by globalization. The most holistic trade agreements exist between developed nations, and we don’t see our trade agreements with Botswana being broadcasted in the upcoming election. Developing countries, if in trade agreements with the global powers, are not in many and there are not always beneficial to developing nations as a whole. This being said, we cannot simply take the fact that less are living on $1.25 a day and call globalization a success. Professor Anderson also emphasized that the informal environment is very important when the formal environment is weak, but developing areas have a much lower chance of success when we rely on their informal environments for much of anything.

While I was shocked the most (at first) by Professor Anderson’s claim that the share of the Chinese population in any country determines trade (although I was convinced by it), the more I thought about it, the more I realized developing nations are often thought of in absolute terms to churn out positive numbers. Then again, the Chinese population in Africa is very low, so maybe this claim can be used in absolute terms to give a correct answer for Africa.

Austerity for Africa

In response to Annelise’s post on Kenya’s public debt, I fail to see the IMF’s justification for practicing austerity for a developing country in the midst of building up infrastructure. I understand Rogoff’s point that countries turn to the IMF as a vendor of last resort once they are in financial crisis, but if the IMF continues to hand out aid this sparingly, it will only be perpetuating the problem; Kenya will be unable to develop and rise out of third-world status.

In light of Collier’s book The Bottom Billion, countries like Kenya are severely underinvested in, resulting in Africa having twice as much public capital as private capital. This should, in theory, result in a high inflow of private capital because returns on capital would be extremely high, but “the perceived risk of investment in the economies of the bottom billion remains high” (Collier, 88). This means Kenya and other African countries are receiving little private investment, so they must rely on public investment and international aid from the IMF; additionally, lack of private capital produces extreme capital flight. “The most capital-scarce region in the world exported its capital” (Collier, 92). This being said, austere measures by the IMF will only worsen Kenya’s situation and even if it results in a positive current account balance, it will be virtually zero.

This does not mean the IMF and other agencies should simply give developing countries large amounts of money; that is possibly worse than austerity. However, if given with conditionally and increased international governance, as Stiglitz suggests, developing countries will become less reliant on public aid in the long run. Part of the IMF’s argument is that other government policies can adjust to fiscal austerity, but when domestic governance is corrupt and of low quality, taking away conditioned aid will only lead to a worse economic situation. I agree with Annelise that the IMF is only thinking in the short-term; they are not considering the repercussions that come from austerity.

The IMF and other international agencies must continue to invest heavily with the aim to increase Kenyan infrastructure further to build a sustainable economy. Once this happens, Kenya and other developing areas will raise their income to a point to where citizens have an incentive not to emigrate, government cannot take advantage of it’s people and it’s economy (or lack thereof), foreign private investment will be attracted, and they will become independent of the IMF’s aid. 

Is Friedman Right?

In a recent article by the Economist, the currency manipulation of China was brought up; a recent topic of discussion in IPE and the presidential debate. The candidates have been debating who would be tougher on China (although Romney has flipped-flopped yet again), by insisting that after being elected they would place restrictions on Chinese products. Krugman refutes this by claiming in the past two years, China has undergone inflation and their currency has appreciated relative to the dollar. Because of these statistics, the famous claim that China is undervaluing its currency to benefit its export market and harm the export markets of other industrial countries is faulty.

The article goes a step further and counters the claim that we even needed to be tougher than we were on China during the Obama administration. He claims that being even tougher would have been counterproductive and harmed us more. This could have perhaps been true, as China could have reacted by stopping the purchase of US bonds, thus raising the price of our borrowing and the interest rate we would have to pay lenders. This raises a peculiar situation, as we cannot upset China too much or else we will lose an incredibly large lender, but to what extent should we stand for China’s currency manipulation?

In another article by the Economist, an even more alarming view is presented by stating that “the dollar’s influence has declined in 38 cases” from 2005-2008, and these were pre-crisis years. They claim that East Asia is now on the yuan standard, their currencies adjusting similarly to the yuan, in the current economy. Other areas of the world still react more to the dollar, but the Economist claims that the Chinese currency will continue to increase “as its economy and trading activity grow in size,” and the Chinese currency will surpass the dollar by 2035.

This statement is pretty striking to me, and makes me question whether Friedman’s worries about Asia and other developing areas surpassing the US may be true on a financial level as well as a production level. Regardless of whether this statistic is accurate, East Asia is gaining influence quickly both in finance, manufacturing, service industry, and intellectual property. We may not need to panic just yet, but we must come to terms with the fact that we are not the unchallenged giant we like to think we are.

Sub-Saharan Africa Development: A Hope or Reality?

In response to Annelise’s post, it is personally shocking how quickly the status of Sub-Saharan Africa has flipped in relation to South Africa. In my book for class, The Bottom Billion, published in 2007, Collier emphasizes how Sub-Saharan African countries are in a stagnant existence of poverty and resource dependence. I’m not sure how drastically their status on development has turned around over the last few years, but if the Economist’s article is correct, they have made substantial progress.

I completely agree that the quality of governance has a large impact on the success of economies, and Africa has historically been the poster-child for bad government. While government may be becoming more legitimate as there is less dependence on natural resources, we cannot disregard that government in Africa is still of lower quality than developed countries. Additionally, governments may be becoming less corrupt in some areas, in Ghana especially, but in Eastern Africa, elections in Kenya and Tanzania still create mass uprisings and make these countries inherently unsafe to travel too. Collier emphasizes that most areas that are landlocked with few natural resources or access to industrial markets have failed to become independent countries, but in Africa, they have succeeded. Thus, many African countries started with a disadvantage for development, and they will need ample time to catch up; something we must take into consideration.

While the IMF and other international agencies are increasing their presence in Africa, as Annelise states, they are not consistently invested in. Collier explicitly notes this, as some African countries do not even have an IMF representative. Wolf and Stiglitz actually agree on this issue, by claiming that the IMF will not come up with a solution in African countries by visiting for merely 3 weeks; they must increase their investment here if they are to enhance the economic standing of African countries. Rogoff’s article indicates that the IMF has increased its communication and commitment to developing countries, but this must be taken in context with the reading of Stiglitz and Wolf; a 3-week visit does not mean investment.

Annelise also emphasizes investment confidence, a prevalent topic in Africa today. Wolf specifically emphasizes the need for foreign direct investment in today’s IPE. It is true that the IMF and other governing organizations may be too optimistic about Africa’s development, as investment without regulation can spur the wrong kind of development. This point directly relates to the moral hazard argument presented by many critics of the IMF; additional funds given to developing countries can be used unjustly. The aftermath of this can readily be seen in South Africa, as they are currently on the decline from a sub-par education system, high unemployment, and corrupt governance.

The best way to develop Africa is an unending debate that began in colonial times and will undoubtedly spread into the foreseeable future. The IMF and other international agencies should not merely visit these regions; they must actually invest in understanding the unique situation of each African country, as each has specific setbacks and resources. International loans are not inherently bad, but unless we increase regulation and the responsibility of lenders as well as borrowers, the hope for Sub-Saharan Africa’s development may not become a reality.

Freeman and Blinder Enter the Debate

In last night’s presidential debate, the candidates discussed the issue of outsourcing and what they will do to make the American economy an attractive venue for businesses. Romney emphasized how he will do this, but it is only possible if other nations play by the rules (aka China). He pinned them as a “currency manipulator,” by pegging their currency to the dollar, and advocated for placing tariffs on them. Obama said he would bring back US companies by closing loopholes that allow US companies to invest overseas and not having to pay taxes on their profit.

The most intriguing part of their debate was, to me, how they defined what jobs we should bring back to the US. Obama emphasized manufacturing jobs, which Romney then said were not high-skill, to which Obama replied later that we need high-skill and high-wage jobs like manufacturing. It seems to me that if we take out the political lingo and get down to the basic concepts, both want to bring back high-skill jobs to the US; the oh-so-comical jargon is preventing them from realizing their common goals.

In regard to manufacturing, I was reminded of Freeman’s article on factor price equalization in Beijing. In his article, US wages have gone down for manufacturing and we have a high opportunity cost for domestic production; a topic neither Obama nor Romney addressed. While both advocated for a reversal of outsourcing, they did not identify their methods for preventing this detrimental effect of the return of US jobs. Neither did they address the problem of offshoring people who are not in the manufacturing sector, as Blinder does in his article on the offshoring of jobs that do not demand personal relationships. He claims that with the rise of technology, more and more jobs will be transferred to the developing world and the US will not be prepared for “the coming industrial revolution.” To recap: neither candidate addressed the repercussions that bringing back manufacturing jobs will have on the US or the effect that offshoring service-oriented jobs is having.

Romney said that we will create new industry, but he did not say what this industry could possibly be. Obama said we need more engineers. In this context alone, Obama comes off as a Freidman supporter, who claims that we must create more engineers (and does so with an incredibly high level of urgency). If Romney would explain what this new industry could be, his argument would be more credible, and if Obama could explain why we need more engineers but not more people-oriented sectors, so would his. While both candidates addressed the problems of outsourcing, it seemed to be fairly inconclusive as to what will actually be done and how we will be prepared to handle any repercussions. 

Government Aid vs. Development

In response to Simone’s post titled “Austerity = Free Market Economy?” I would agree that free market economies are indeed indicative of global financial growth, thus they allow for financing and investment in the private sector.

However, even if investors do not care what the government supports, they are constricted (to varying degrees) of the government’s stance and involvement in the economy. We discussed this issue primarily with the contrasting views of Stiglitz and Wolf, concluding that investors and other private actors cannot function as they please without some influence of the government’s stance.

I do not believe that increasing governmental aid necessarily helps the economy, and it can create dependence and decrease output. If we do not rely primarily on aid but on sustainable economic development, I don’t think government intervention is automatically harmful. Aid within a country can create dependence just as it can when given to foreign states; the analogy that giving a man a fish is not nearly as productive as teaching him to fish holds in the international and state-based economy. We must not consider government aid as “handouts” to companies only although it could potentially take this form. Greece is undoubtedly suffering and there is dependence on the government, as many capitalists and entrepreneurs emigrated out of the country when or before the financial crisis hit. Continuing to give its citizens government aid will only exacerbate the problem, but that does not mean we should cut off all funds and let citizens fend for themselves. If we do not raise their capability and give high-quality government intervention, we cannot expect capitalist competition to emerge from nothing. Having the government run the economy is not at all what I am suggesting, but by completely isolating citizens and corporations from guidance and capability raising endeavors, we will see the same if not worse effects from giving them continued aid.