Recently, at a public event organized by the Austrian Development Agency in Vienna, I had the opportunity to discuss with Paul Collier, Oxford University professor and author of (among others) the widely acclaimed books on development economics “The Bottom Billion” and “Wars, Guns and Votes” the issue of whether the ongoing global crisis and past experience warranted a new development paradigm. In what follows I outline Collier’s main lines of argument (regular script) and my own comments (in italics).
It does not make sense to talk about “less developed and emerging countries”, because the emerging countries are very close to the industrial countries. It is necessary to concentrate attention on the 60 or so countries which “house” the Bottom Billion, i.e. the approximately 1 billion people living in abject poverty, most of them in Africa.
I agree on the focus on the Bottom Billion, but still would not like to ignore the emerging countries, where still most of the world’s poor live. Different strategies might apply to them, but they still need attention.
- Among the Bottom Billion special attention needs to be directed towards resource-rich countries. Resource-rich countries in Africa still have only 1/5 of known natural resources of the rich world. This is solely due to the fact that exploration efforts have lagged there. On average, the whole world, or each continent, has approximately the same amount of resources per square mile.
For resource-rich countries the major problem (“resource curse”) is that production-sharing agreements and licences are handed out in non-transparent ways which enriches foreign companies and (corrupt) local politicians, but not the population. The solution lies in public and open auctions which create accountability.
I do not believe the argument that every square mile in the world is home to the same amount of natural resources, even on a continent basis. Basic geology should call this into doubt. While exploration efforts in Africa may have been too low and should be increased, still some regions/countries possess more resources than others.
Auctioning is one instrument to create fair and open prices and public knowledge, thus the basis for accountable sharing of resource revenues; but it is not the only one and needs different power structures than at present. The Kimberley Process, the Publish What You Pay Initiative, the Extractive Industry Transparency Initiative – all attempt the same, so far with limited success. However, they need to be pursued with more vigor and more pressure by industrial country governments on their resource firms which are active in less developed countries.
- 2. Foreign Direct Investment is an important contributor to development. Proponents of SME- (small and medium-sized enterprise) driven growth are romanticists, promote “cozy” solutions and have their godfather in the reactionary British Prince of Wales.
I strongly disagree: while FDI bring employment, know-how and exports to the host country, they frequently exert strong unfavourable conditions on the host country, having much stronger economic and legal leverage and resources, thus creating insular employment. They may have low net export performance (because of importing many raw materials and semi-finished goods) and often bring very little spill-over into the local economy. They need to be supplemented (not replaced) by attempts to create SME-driven supply chains and indigenous development enterprises which have higher success in poverty alleviation and employment generation, are spread more evenly over the whole country and are less based on cheap labor. SME-driven growth requires an adequate industrial policy, building up industrial know-how and capacity in stages.
- Agriculture in Africa is characterized by very low productivity, thus commercial agriculture, based on imported logistics, know-how and economies of scale is necessary – in addition to infrastructure investment, in order to bring the products to the market and to exports. This also requires better access to rich countries markets, elimination of subsidies in rich countries. Climatic problems should be solved by introducing genetically engineered seeds, small-scale peasant agriculture needs to be replaced. Proponents of peasant farming are romanticists, etc… (see above under 3)).
Many LDCs suffer from food shortages, exacerbated by last year’s food price crisis – which still persists. Marginal lands need to be used, land reform needs to turn unused arable into farmed arable land, export crops need to be supplemented by locally marketed food, and food supply chains need to be built, including the necessary infrastructure. I doubt whether GMO is the solution, mainly because it causes irreversibilities, separates seed production from food production and thus increases dependence on (mainly foreign) seed supply firms.
- 4. Climate change and its effects are already the somber reality in many LDC. For LDC, the key policy is not mitigation, but adaptation. Their contribution to the world’s pollution and climate problems are irrelevant, they need to learn to adapt to harsher climate conditions. If agriculture becomes unviable, the way out is forced industrialization – which is less climate-affected. Also for developed countries mitigation issues are overplayed, technology will save the world from climate shocks – as it has done in the past. Technological development will lead to more efficient use of fossil fuels, and eventually to other energy sources.
I agree on the importance of adaptation focus for LDC, but not on the irrelevance of mitigation for them: deforestation, striving for “Western” consumption patterns, urbanization, wasteful water usage, and many more pollution problems need to be tackled also by LDC. Following rich countries patterns, in the hope that technology will solve it all, is misleading policy advice. Recent technological developments do not inspire a lot of confidence in technological solutions, after all, technology development is driven by interests – which have caused the present problems. Paul should take his countryman Nick Stern’s reports to his heart and not rely on some higher forces. Doubtless, we will need technological development, but a more sustainable world economy can only be created by behavioural change and adequate incentive systems.
- The funds needed to help the Bottom Billion countries are small relative to the sums expended to save the financial sectors of the rich countries. The large capital inflows into LDC during the past 10 years will not come back in the medium term, thus official development assistance (ODA) from rich countries needs to fill the gap. Such assistance requires conditionality, not policy conditionality, but governance and behavioural conditionality. Without that, these flows will end up in the wrong hand and not deliver development.
While ODA is still in a “learning phase” having taken off seriously only after the end of the Cold War, it needs to be perfected. All calls for the elimination of ODA may have some valid points about past experience and weaknesses, but there is an obligation (both for reasons of self-interest and morality) to help poor countries.
Net Financial flows from rich to poor countries rose from around 100 billion $ in 2000 to 1.000 billion $ in 2007, fell to 460 bill $ in 2008 and to around 160 bill $ in 2009 (World Bank forecast). Most of these flows came from the private sector. These last few years before the crisis must be seen as exceptional: while rates of return were high, risk assessments were absent. Today risk assessments are prohibitive, with high likelihood that they will stay so in the medium term – in spite of potentially higher expected returns. Some flows will come back to LDC, but highly skewed into very few countries. International Financial Institutions will not be able to fill the gap – in spite of efforts by all of them to increase their volumes during the crisis; bilateral ODA from rich countries is falling – in spite of international agreements to the contrary (MDG, Monterrey, Gleneagles, etc.). LDC will have to rely more on their own (too small resources), potentially more on “South-South” flows (China, India, Brazil…). But growth in LDC will be slower on account of capital scarcity. Better channelling of remittances, better barriers against capital flight, more rational taxation systems and local savings need to be developed, in order to resume some growth activity.
From his arguments I would conclude that Paul Collier does not see a need for a “new development paradigm”, but rather improvements in what we have been doing in the past. Paul Collier’s analysis of development problems offers very interesting insights. His emphasis on good governance, on fair raising and distribution of resource revenues, on the necessary avoidance of the devastating effects of internal and external conflict and on regional solutions for landlocked countries, – all backed up by loads of empirical evidence, show high relevance. Some of his policy descriptions are based on unabashed confidence in functioning markets and especially in technological solutions. While both these may contribute importantly towards social and economic development, they need to be supplemented by recognition of historical, cultural and geographic context, “unorthodox” solutions, more acceptance of policies by the citizens of LDC, more participation and the readiness to influence behaviour of all development actors towards sustainable development processes. Not least, the unequal distribution of power and income in the world need to be addressed, in order to bring acceptable opportunities to the people in less developed countries.