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The aid evasion and the "bottom billion"

About the author
Paul Collier is professor of economics at Oxford University and director of the Centre for the Study of African Economies there. His latest book is The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It (Oxford University Press, 2007). His homepage is here.

Since the 1960s countries with around a billion people have been diverging from the rest of the world at an accelerating rate, a trend which will generate unmanageable social pressures. Most of these countries are in Africa, and so it is appropriate that the region should again have been on the Group of Eight (G8) agenda at the summit in Heiligendamm, Germany on 6-8 June 2007. Unfortunately, the debate on what the G8 should do has been entirely dominated by aid. More aid for parts of Africa would probably be helpful, but it would not be decisive in reversing divergence. It is, in fact, a sideshow relative to the other policy instruments that G8 governments control. It is the failure to use these instruments that is the tragic missed opportunity. Because aid has dominated the airwaves people are simply unaware of our true potential for action. Africa faces three distinctive economic problems, each amenable to a distinct policy.

Paul Collier is professor of economics at Oxford University and director of the Centre for the Study of African Economies there. His latest book is The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It (Oxford University Press, 2007). His homepage is here

Martin Wolf's review of The Bottom Billion - "How the bottom billion are trapped" (Financial Times, 13 May 2007) - is here
The trade hurdle

The first problem is that the region has failed to diversify into labour-intensive manufactures. Countries such as Kenya are well-suited for manufactured exports. Unfortunately, they have missed the globalisation boat: Asian cities now have massive concentrations of manufacturing activities geared for export, generating "economies of agglomeration" which lower costs of production. For example, 60% of the world's buttons are now made in one Chinese town, Qiaotou: how can Africa compete in the manufacture of buttons!

Africa's coastal cities needed to be pumped-primed over the entry threshold constituted by these agglomerations and for this they need a temporary advantage over Asia in Organisation for Economic Cooperation and Development (OECD) markets. Both Europe and the US already provide this through Everything-but-Arms (EBA) and the Africa Growth and Opportunity Act (AGOA): we impose tariffs on goods from Asia but let them in duty-free if they are made in Africa. However, with trade deals the devil is in the detail and both schemes are flawed. Currently, Kenya can export its shirts duty-free to the United States, but not to Europe or Japan. EBA is so badly flawed that it is ineffective, whereas AGOA, despite weaknesses, has raised African exports of garments to the US market by around tenfold in five years. Africa needs a pan-OECD scheme with the details right. So deployed, our trade policy has the potential to create millions of jobs in Africa.

The G8 had both Africa and trade policy on its agenda. Even if Doha is retrieved at this late stage and turned into a success, Africa will get nothing out of it. So, if the G8 had been serious about helping Africa through trade it could easily have resolved to merge AGOA and EBA into a common and improved scheme. Since both schemes already exist, no issue of principle with the WTO would be involved in such a merger. On the contrary, the simplification and harmonisation of preference schemes is surely compatible with the spirit of global trade liberalisation.

The growth obstacle

The second problem is that the resource-rich countries have almost all failed to harness windfalls for sustained growth. In a new analysis of how high commodity prices affect commodity exporters I find that after a few years of boom, in the long term the effects are catastrophic unless governance is good. The current high level of commodity prices, together with new discoveries, present Africa with a huge opportunity: it would be a tragedy if history were repeated. But history will be repeated unless the incentives are changed through institutional reform.

Because these windfalls inevitably accrue to governments, the key to change is better accountability in public spending. Democracy is not enough: the recent Nigerian experience show how elections can be manipulated. Accountability depends upon a range of effective checks and balances which are currently missing because nobody has an incentive to supply them. The needed policy is new international standards and codes. The Extractive Industries Transparency Initiative (EITI) is a modest beginning. The international banks remain home to corrupt African money under a veil of secrecy: if the money is linked to terrorism the banks are legally required to report it, but if it is merely money looted from the poorest countries in the world the banks can remain silent.

There are no international standards that recommend appropriate savings strategies for managing windfalls: when Ngozi Okonjo-Iweala became finance minister of Nigeria she had to invent a savings rule. There are no recommended procedures for awarding resource concessions. Just as all OECD companies are now required not to bribe, so they should be required to win the contracts for resource extraction through verified auctions instead of through secret deals. There are no recommended guidelines for the transparency of public spending out of resource revenues. The absolute minimum should be clear rules for the competitive tendering of public-investment projects: when Nigeria introduced such rules, only very recently, costs fell by 40%.

The checks and balances that help natural resource revenues to be harnessed for development are an internal African struggle, but international standards help: they provide both a rallying point and a benchmark for internal-reform efforts. The Nigerian reformers promptly adopted the present limited form of EITI as the foundation of their programme for change.

Again. this issue was quite rightly on the G8 agenda. The result was merely a bland exhortation to good governance. Leaders failed to get serious and instruct the international institutions to put together a comprehensive set of standards and codes pertinent for resource-exporting countries.Also in openDemocracy on the G8, Africa, and the politics of aid:

David Styan, "Tony Blair and Africa: old images, new realities"
(26 June 2005)

Michael Holman, "Welcome to the aid business!"
(27 June 2005)

Ehsan Masood, "The aid business: phantoms and realities" (18 July 2006)

Michael Holman: "Africa: celebrity and salvation"
(23 October 2006)

Stephen Browne, "G8 aid: beyond the target trap" (6 June 2007)

Chukwu-Emeke Chikezie, "Africa at the G8 summit: déjà vu?"
(7 June 2007)

The insecurity wall

The third problem is that much of Africa faces high risks of internal insecurity from rebellions and coups. Partly this is due to decades of economic failure, and partly because the typical country is too small to reap security economies of scale. Africa needs a stronger international-security presence: prolonged peacekeeping in the fragile post-conflict situations, and "over-the-horizon" security guarantees elsewhere. Both of these should be conditional upon clear standards of governance which could be set by the African Union. The model is the provision of external security for Sierra Leone, about the most effective form of aid Europe has ever given to Africa.

Understandably, this is the issue that the G8 was most reluctant to face. It postured over Darfur, but avoided the issue of shoring up the many fragile post-conflict situations around Africa through security guarantees. As we lurch between fear and belligerence we keep making mistakes: Somalia in 1993, Rwanda in 1994, and Iraq in 2003.

Trade preferences, standards and codes, and security may not play as well on the streets of Europe as doubling aid, but they are likely to be more effective on the streets of Africa. However, they are not alternatives but would enhance aid programmes. Before dismissing them as fantasies think how Europe was restored after 1945. The Marshall plan was complemented by trade policy (Gatt), by standards and codes (OECD and the European Community), and by security (Nato). In my new book The Bottom Billion: why the poorest countries are failing and what can be done about it I lay out how the leaders of the G8 could go beyond the politics of gestures and really make a difference. Judging by their performance in Heiligendamm, they need to read it.

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