Monday, July 18, 2011

The Bottom Billion: A Book Review (The Traps)

Well, it has been too long since my last blog post, so I'll get back in the saddle with a book review that could have been written long ago. For three years now I've utilized chapters in The Bottom Billion for the Economics of Compassion course. The author, Paul Collier, writes in excellent prose some fairly advanced concepts, but, another reason I like the book is because it represents an in-between view of the politicized foreign aid debate between Sachs and Easterly.  The book has an intuitive structure where Collier diagnoses the so-called "Traps", holds intermission with a discussion on globalization, and continues by offering his "Prescriptions". Overall there is a strong admonition not to fall victim to the "headless heart". In fact, like Saint Ignatius said, "God assumes intelligence" and we are also to love God with all of our hearts, soul, strength, and mind.  Thus, long time readers of the blog should not be shocked, I am an advocate of using the mind.

The so-called "traps" are conflict, natural resources, landlocked with bad neighbors, and bad governance in small countries. What does Collier mean by "traps"? These are not black holes of failure from which countries shall never return, rather, these four traps (conflict, natural resources, landlocked with bad neighbors and bad governance) are difficult to escape from and can potentially lead to cycles of poverty. In an effort to help my class remember the key content from those chapters I came up with the following mnemonic: DUMP SID NOT CARL. To our single female readers: you are welcome for the free advice.

The Conflict Trap (DUMP - Destruction, Uncertainty, Misery, and Poverty) 
This trap begins with destruction. Conflict destroys physical infrastructure such as buildings and transportation materials as well as disrupts present production. Additionally, conflict also severs social bonds and disrupts children emotionally and hinders their ability to acquire knowledge. Perhaps the most vile fact about conflict is the legacy it leaves: uncertainty. Because there is such a high reversion into conflict after recently emerging from a civil war (Collier cites 50% chance) companies are reluctant to invest in such an unstable nation. Meanwhile there are no opportunities, prospects, or hope for the future. What is there? Misery. The most likely candidates for recruitment into rebel forces to start a new conflict are young males with low education and no dependents. Also, no job equals low opportunity cost for joining the ranks. Now, restart the conflict. This both creates poverty and a situation in which poverty can persist.

The Natural Resource Trap (SID - Survival of the Fattest, Institutions, and Dutch Disease)
This seems like an oddity. Why on earth would natural resources such as oil, gas, diamonds, metals, etc. be a trap? It seems like natural resources ought to be a blessing. And, they are, now here is the the big BUT, without good institutions they will become the profits for power. (Remember, institutions are the social and legal rules governing human interaction. Such rules would include property rights, transparency over where government funds are allocated, the checks and balances of democracy, etc.) Good institutions can help the natural resources to be prosperity enhancing, without them, natural resources basically promote poverty because the potential profits to be made attract certain kinds people to power.

*Notice in the last sentence I said "can help". Why didn't I use the stronger statement "will help"? Dutch Disease. There is this idea in economics that large natural resource endowments can actually harm an economy. For example, imagine that a country is a big exporter of motor scooters when suddenly some in-land farmers are shooting dinner and that good ol' black gold bubbles up. Now the country exports oil and motor scooters, but, their scooter market is in shambles because the value of the currency has gotten so high. Why is the currency high? When you buy a country's goods like oil you buy their currency. As more people are demanding the country's currency (to buy the oil) the value of the currency increases. What does this have to do with scooters? Where an importer of scooters would only need to pay $50 per scooter before they will now have to buy the country's more valuable currency in order to import the same scooter. Now it might cost them $70 for the same scooter. Maybe they will buy elsewhere. What can combat Dutch Disease? We'll get to that in the next post.

The profits to power from controlling a natural resource leads into a core idea Collier has called Survival of the Fattest. Normally in electoral competition the politician who promotes the best mix of policies wins the election. This would be Survival of the Fittest. In countries with large natural resource endowments however this kind of electoral competition does not take place as easily due to corruption. Instead, politicians in these crooked regimes can use the profits from the natural resource to buy votes. Moreover, their corrupt practices keep potentially good politicians from entering the political process because they can see everything is rigged. Such a rigged process and the wealth it creates for the select few in higher ranks of government also attracts more power hungry. Over time the integrity of the government disintegrates.  

Landlocked with Bad Neighbors (NOT - Neighbors, Opportunities, Transaction Costs)
Close your eyes and imagine your most unreliable friend. What would happen if you had to bet your future on them coming through for you? That is the situation of the people in landlocked countries with bad neighbors. It is all about the neighbors. Switizerland for example is landloced; yet, Switzerland is successful in part because France and Germany are both well-functioning economies. When landlocked countries have bad neighbors they lack opportunities. As Collier writes, "When you're coastal you serve the world. When you're landloced you serve your neighbors." Bad neighbors make fore weak opportunities. What further harms opportunities are the high transaction costs. Transaction costs are obstacles to trade. They can be anything from poor roads, bad ports, no airfield, extortion that occurs on the road or from customs officials. All of these things increase the cost of trade. Being landlocked is not so bad, but, being landlocked with bad neighbors hurts.

Bad Governance in Small Countries (CARL - Corruption, A?, Reform, Largeness)   
This underpins most of the traps already discussed. The role of corruption is simple: It corrodes political checks and balances and hinders growth (we can talk about this in greater depth on a future blog post if you like). But, the reason Collier writes that bad governance is such a hindrance to "small countries" is based on an empirical finding. In order to reform a country Collier argues that countries need a large educated population and a large general population. This helps with building a critical mass of people for reform within a country. Also, Collier argues that recent emergence from civil war helps to turnaround a country's prospects. Think about that on an individual level. When are you most likely to change? Perhaps when you have hit rock-bottom. Things are more fluid in those situations and we are more accepting of change than we otherwise would be. But, reform is more than population size and level of secondary education it also requires courage and a special person to stick their neck out. There is no doubt a human element. Becoming free and staying free however are two different things.

What keeps a country free from falling back into all these traps? Stay tuned.

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