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The Bottom Billion: Opinion Piece from Ross Gittins
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Sep 16th, 2007 - 12:01:32 |
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Trade beats aid when it comes to helping poor
Source:
http://www.smh.com.au/news/business/trade-beats-aid-when-it-comes-to-
helping-poor/2007/09/14/1189276984127.html
Ross Gittins
September 15, 2007
It no longer makes much sense to think of the countries of the world
as divided into rich and poor. Globalisation has created a big
category in the middle.
It used to be common to picture the world's population as 1 billion
rich and 5 billion poor. The 1 billion rich are people in the 30
countries of the Organisation for Economic Co-operation and
Development.
Today, however, it is more meaningful to think of 1 billion rich and
4 billion in countries that are rapidly developing and converging on
living standards on the rich, leaving 1 billion in countries that are
"falling behind and often apart".
This is the thesis of The Bottom Billion: Why the poorest countries
are failing and what can be done about it, by Paul Collier. Collier's
thesis is discussed at length in an article by Terry O'Brien in the
Treasury's latest Economic Roundup.
To see why it makes more sense to divide the world this way you need
only look at the rates of growth the three groups have experienced
over the 25 years to 2005. The real income per person of the rich
group grew at an average rate of 1.8 per cent a year, producing total
growth of 57 per cent.
For the middle 4 billion, the average growth was 3.5 per cent a year,
or 137 per cent in total. This much faster rate of growth did not
stop the gap in real average income widening in absolute terms, from
about $US14,000 per person in 1980 to about $US21,000 today.
Even so, the average income of people in the middle group rose from
one-eighth of the rich-country average to one-fifth. So there are
clear signs of the middle converging on the top.
Note that more of the world's extremely poor people lived in these
middle countries - which include China and India - than in the
"bottom billion". This is good news because living in a faster-
growing economy offers the best chance of rising above absolute
poverty.
But here's the point: this left the real income per person of the 54
countries making up the bottom billion growing by only 1 per cent a
year over the past quarter century, yielding total growth of just 29
per cent. Worse, if you look just at the bottom half of the bottom
billion, their income per person actually went backwards, contracting
by a total of 7 per cent over the period.
The point of this categorisation is clear: the plight of people
living in the bottom 50 or 60 countries deserves much more attention
than we need to devote to the middle-income group, which is making
good progress.
Almost all the bottom billion countries are small, and most of them
are in Africa. But here's the rub. They include six of our Pacific
neighbours: Papua New Guinea, the Solomon Islands, East Timor, Tonga,
Vanuatu and Kiribati. (They also include Cambodia, Laos, Burma and -
if only we had the figures - North Korea.)
When Europeans are reminded of the poor performances of many African
countries their instinct is to call for more aid to those countries.
But Collier argues that helping the bottom billion is not a task for
which traditional aid is well suited.
He believes that aid to these countries may already be at levels that
produce "diminishing returns". That is, each extra dollar of aid does
less good than the one that preceded it.
Why so gloomy? Because, Collier argues, the countries of the bottom
billion are caught in at least one of four common traps. These traps
stop them joining the middle-level developing countries in their
climb to prosperity.
The first trap is armed conflict. Almost three-quarters of the people
in the bottom billion live in conflict or post-conflict countries.
Surprisingly, Collier's research has found that conflict - whether
civil wars or coups - is little related to the intensity of political
repression or the depth of historical grievances. "Rebels usually
have something to complain about and if they don't, they make it up,"
he says.
Rather, violence is best predicted by poverty, lack of growth,
dependence on misgoverned resource wealth and a previous history of
civil conflict or coups. So the best way to prevent conflict is to
work on the other factors inhibiting economic growth.
Collier argues that prolonged foreign intervention and small local
forces are better ways to prevent violence than is relying on large
local forces.
This is because, in the bottom billion, large local forces tend to
operate as a protection racket, extorting funds from their government
under the implicit threat of a coup.
His studies suggest that some 40 per cent of the cost of large
militaries in many bottom-billion countries is inadvertently - and
indirectly - financed by overseas aid.
The second trap is "mismanaged dependency on natural resources".
Almost a third of the bottom billion live in countries that are
resource-dependent.
What ought to be an economic blessing turns out more commonly to be a
"resources curse", with the "economic rents" (excess profits) arising
from the oil deposits or whatever leading to corruption, patronage
politics and often autocracy.
Not to mention Dutch Disease - the tendency for big capital inflows
from exports of the favoured resource to lead to a high exchange
rate, which cripples other export and import-competing industries.
The third trap is weak governance in small countries. With so much
reliance on aid or revenue from one resource, the public sector
accounts for too much of the economy, with too little incentive to
pursue efficiency.
The fourth trap is being "landlocked with bad neighbours". This is
very much an African problem. "If you are coastal, you serve the
world; if you are landlocked, you serve your neighbours," he says,
and are limited by their economies.
If you, and they, don't have good transport infrastructure,
opportunities to grow by trade are limited. This is where our Pacific
neighbours fit in. They are not landlocked, but high transport costs
greatly circumscribe potential growth in living standards.
Collier argues that aid is poor recompense for the damage done by the
rich countries' agricultural protectionism, whereas protectionism
within the poor countries occurs mainly because it is a key
instrument for corruption.
He suggests that the rich countries help by making unreciprocated
reductions in their protection against the least developed countries -
something Australia has already done.
It's not much, but there are no obvious, easy answers when it comes
to helping the bottom billion. As ever, trade beats aid.
Ross Gittins is the Herald's Economics Editor
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