WEBVTT

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Student:  Okay,
so today Professor Rae is not

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going to be here and so we're
going to watch two videos

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instead,
one of him and second one is of

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Paul Collier talking a little
bit about his book,

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but also about recent research
that he's done,

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especially on governments and
commodities.

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We're going to start with the
first video and then go straight

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into the Paul Collier video;
so enjoy.

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Prof: Hi there.

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As you know I'm in Washington
today,

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and Jim Alexander has been kind
enough to preside over the

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Monday class,
and I want to get in twenty

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minutes or so of background
thoughts taking us from the

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SELCO case,
where the question was how to

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organize the distribution of
distributed electrical

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generating to bottom billion
areas of India.

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From that very specific set of
questions to the much larger

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question about understanding the
plight of the world's bottom

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billion,
and the available strategies

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for trying to be helpful to
them.

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The main text for this class
and the next is Paul Collier's

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Bottom Billion,
which is, while not a page

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turning thriller like White
Tiger,

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is a very solid,
serious, and substantial piece

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of scholarship by somebody who
has been engaged both with the

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best of growth economics as a
scholar,

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and with the practical work of
the World Bank,

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where he was head of research
for a good long time.

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The default assumption in
thinking about the bottom

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billion is to begin with the
world demographic transition and

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the thought that most of these
people are the products of stage

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two and stage three
demographies;

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where birthrates were vastly
higher than death rates,

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and so you had a huge surge in
population and you found--

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and many people in those
societies found themselves in

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the same predicament as the
protagonist in White

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Tiger, as being one of way
too many candidates for every

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job and having little or no
market power,

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and consequently,
little or no income.

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Collier's take is to say,
"Well let's just grow

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incomes."

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It's not a bad approach,
and he's perfectly aware of the

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objections I'm going to make to
it in the next few minutes,

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but let's just catalog what it
means.

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The gross domestic product is
at once too broad and too

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narrow, as a measure of value
generated by the economy.

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For example,
if a housekeeper and her

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employer,
or his, marry one another and

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he or she continues to keep the
house but now on the basis of a

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spousal relationship the cash
goes away and the value is

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deducted from the GDP,
while in fact,

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nothing has much changed.

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Or suppose a crime wave hits a
society and enormous damage is

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done to property by crime,
it requires repair;

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those repairs get recorded in
GDP and can easily be mistaken

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for an improvement in the
condition of people living

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there.

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Further, people buy better
locks, video cameras,

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perhaps even weapons,
and those too are recorded as

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improvements,
when in fact they really aren't

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improvements.

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Or take disease.

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A--one society is relatively
healthy and has relatively lower

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medical expenses than the other,
yet the second,

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the one with the high medical
expenses,

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would be accounted as better
off.

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Finally, to get just how
mechanical this measure is,

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if for any reason we were
prepared,

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the government say,
was prepared to pay people to

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dig holes and then fill them
back up with the same dirt and

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pay them a salary for that,
we would have increased GDP.

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Those are ways in which the
measure is too inclusive.

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There are others ways in which
it is not inclusive enough.

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It doesn't include--the saying
"The best things in life

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are free,"
well that may not be entirely

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true,
but some of the good things in

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life are free,
and those need to be measured

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in an accounting of how well off
a society is.

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The leading substitute measured
these days for GDP per capita is

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the human development index as
put forward by the World Bank

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and parallel institutions,
which gives--which takes GDP

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per capita as one part of the
story,

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adds to it longevity,
and then supplements that by

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adding a measure of education so
you get a somewhat broader

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measure that captures the surge
we see in Hans Rosling's

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wonderful data animation as
lives become longer and

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prosperity greater.

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So one thing to do is just
tinker with the measure.

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There's a second set of issues
that have to do with the value

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of income.

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I've got some childlike
drawings here to share with you.

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If we represent the dollar
income of Mr. A on the

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horizontal axis and of Ms.

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B on the vertical axis,
then GDP for these two people

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is calculated just by adding the
one to the other with no

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attention to the distribution
between them,

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so that all the points on this
indifference curve would

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correspond to the same GDP as
one another,

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and all the points on this
indifference curve would

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likewise so correspond.

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Well that's okay,
there's nothing wrong with

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that, except if you want to
infer from it the value shared

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by A and B in the use of that
income.

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A generally accepted hypothesis
is that the value of income,

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and economists would use a term
utility,

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let me just stick with
value--the value of income first

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increases and then decreases at
the margin,

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so that you get an S shaped
curve like this.

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On the horizontal axis we have
how much income people get,

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and on the vertical axis how
much value they derive from it.

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Now imagine down here around
point A where people have

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precious little income,
so little that they cannot feed

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and clothe, and lodge
themselves.

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Well think of a setting like an
American city and imagine

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doubling your income,
annual income,

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from $25 to $50.

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Well that would move you a
little ways along the horizontal

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axis but it wouldn't lift you up
the vertical axis because it's

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not going to make a difference
until you get to some threshold

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where you actually begin to get
increasing returns from rising

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incomes,
as in the zone I've labeled B

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here.

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Then eventually incomes like
Richard Medley,

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whom we met a month ago or
Paolo Zanonni,

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who we'll meet in a couple of
weeks,

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at their incomes the--so wide a
range of material needs are

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already satisfied that the
marginal dollar gets less and

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less valuable.

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The implication of this for the
relationship between GDP per

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capita on the one side and a
judgment of how well a society

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is doing on the other is that
there's--

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we should probably have some
egalitarian bias in the way we

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interpret the numbers.

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Where most people get to the
level that I'm pointing at here,

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where the diminution of
marginal value really sets in,

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where most people get to that,
that's kind of where you want

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to be,
and Collier's emphasis on the

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bottom billion responds to that.

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The SELCO project,
for example,

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which we saw a moment--
saw--well actually I'm speaking

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just an hour after class,
which we saw in Wednesday's

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class, is aimed at trying to
bring people up that steep part

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of the curve,
maybe not very far but a little

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ways,
by judiciously providing the

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opportunity to purchase electric
light or electric power for such

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other purposes as running a
sewing machine or preparing

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goods of some kind for sale.

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The common sense response to
this S curve is to pay special

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attention to people who are near
its bottom and try to find ways

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to help them push themselves up
the curve.

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Now as a sidebar let me just
mention John Rawls,

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who published in 1971 a classic
book,

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a book that will be read
hundreds of years from now,

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I imagine, called A Theory
Of Justice,

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and Rawls asked people to
imagine that they were behind

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what he called a veil of
ignorance,

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and the idea of the veil of
ignorance is roughly that you

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have no idea who you are.

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It's a little like Adam Smith's
device in Theory Of Mortal

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Sentiments.

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But the question is,
if you had no idea who you were

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before we set up the basic
institutions for a country,

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or for the world if we think of
it on a global scale,

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what would be your way of
structuring alternative

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arrangements so that you could
find one that you thought was

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best from--
for you from behind this veil

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of ignorance and on which you
could agree with everyone else

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behind the same veil?

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His idea, stated way too
simply, is that you should

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maximize the welfare of the
least advantaged group in

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society.

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The intuition is that that
group would be unskilled labor;

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and that doesn't mean that you
should knock down inequalities

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necessarily.

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Indeed, if allowing bankers,
engineers,

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and entrepreneurs to reap
substantial and very unequal

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benefits from their work will
ultimately read down to the

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benefit of this unskilled labor
stratum,

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then that's great.

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A Rawlsian picture of the
indifference curves which before

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Rawls' are L shaped,
and so if we're here,

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so that this person is way
better off than this person,

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we try to move to a higher
indifference curve from the

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point of view of the less
advantaged person;

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and symmetrically here we try
to move in this direction,

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so that the L shaped
indifference curves,

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if there were just two people
in the society would drive us to

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seek the highest one,
and it would have a powerful

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middle-of-the-road bias to it,
but it wouldn't have so

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powerful an egalitarian kick
that it would knock down

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equality to an extent which hurt
even the less skilled parts of

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the workforce.

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Societies--and we know
societies that have reached that

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level, in my judgment Castro's
Cuba is just such a case and I

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know it fairly well;
North Korea,

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which I know much less well,
appears to be such a case.

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Okay so that's all by way of
background,

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and now I just want to talk
rather briefly about the

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introductory series of traps in
Collier's book,

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and the traps are his way of
summarizing things that can go

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very wrong for a country and put
it way behind the rest of the

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world in economic growth.

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Now as background,
Collier is really thinking

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about what we would call
"emerging market

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countries."

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He's not thinking about
Germany, Japan,

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Canada, or the states.

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He's thinking about India,
Bangladesh,

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Kenya, Zimbabwe,
Bolivia, and Mexico,

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countries which are just
finishing the world demographic

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transition,
and are relatively late

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entrants as full players in
capitalist development.

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The majority of them--and
Collier gives very little stress

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to this,
and he probably should give

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more--the majority of these
countries were colonial sites

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for European powers,
and India is just such a case,

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for example--
and the British Empire was

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enormous.

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Other countries were subject to
the Dutch,

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the French, and other--and the
Spanish,

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and the Spanish actually are
quite important,

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European powers which treated
them as subordinate economies

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and structured their governments
to the advantage of the

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metropolitan country.

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Trap one may be,
be a colonial site,

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and be set back by it.

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The other side to that story is
that the colonial powers

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sometimes left something good
behind.

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The extraordinary quality of
technical education in India,

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for example,
is in part an outgrowth of

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British education and the
systematic inculcation of

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British educational values.

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Wouldn't want to go too far
stressing that,

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but it's there somewhere.

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Okay so the Collier traps;
the first one is what he calls

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a conflict trap,
and according to him 73% of the

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bottom billion live in countries
which are now in civil wars or

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have recently been in civil
wars.

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That's a stunning number,
and the world which occupies

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the front page of every major
newspaper--

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Somalia, Iraq,
the incredible mess in

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Afghanistan,
many other less dramatic cases,

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these are all countries where
civil strife has defined life to

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a considerable degree in let's
say the last twenty-five years.

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Well the--Collier spends some
time asking the causes of that.

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He rejects the common sense
popular explanation is ethnic

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conflict.

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He says that ethnic conflict is
actually quite a lot less

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important than simple poverty.

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That countries with very low
GDP per capita are greatly--

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at much greater risk of civil
war than countries with higher

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GDP per capita,
and that countries with growing

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GDP are more secure than those
with static GDP,

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particularly static GDP at a
low level.

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Not much news in that but it's
actually very important because

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if you think about the logic of
capital development--

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capitalist development,
and you take either the Coase

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Theorem or de Soto's development
of the Coase Theorem seriously,

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which I do and I urge you to,
it's built on the foundation of

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the Westphalia nation state
system,

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which came into being in the
middle of the seventeenth

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century.

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Where civil wars are still in
progress that system isn't

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there;
a civil war is indicative of a

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failed state,
and a failed state can't

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perform the capitalizing
functions of government which

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are so central to the story de
Soto tells us,

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and about which I think he is
very right.

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The palliatives for this are
not obvious.

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One thing we've pretty much
learned is that third party

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interventions in civil wars,
by and large,

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are not terribly successful.

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The second of his traps is the
natural resource trap,

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where the standard case would
be oil,

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but it could be any other
commodity that is exported at

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great value with--
and which can be harvested and

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processed and shipped without
developing a huge economic

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infrastructure,
or a nimbly functioning

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internal market.

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The gist of this one hinges on
what he calls Dutch disease and

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the idea here is that when the
Dutch began to export North Sea

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oil at great profit to their--
to the value of their currency

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the inflation in the value of
the currency made their other

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export products less and less
competitive and caused a kind of

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lethargy in the country.

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That's one piece of it.

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The other piece,
which I think is actually more

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important, has to do with the
relationship between democratic

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rule and oil or other export
products.

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If you'll look carefully at
page forty-three of Collier's

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book,
he tells a story which is

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actually,
it's a fairly subtle story and

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I think it's a true story,
and the gist of it is that

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where an economy functions
largely by exporting something

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like oil,
that the impact of democratic

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government on the economy is to
reduce the rate of growth.

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Whereas, in economies where
that form of export production

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is not important,
democratic government and the

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rule of law relates to an
increasing rate of economic

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growth.

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His slightly smart aleck term
for this is survival of the

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fattest,
and if you look at the behavior

23:48.096 --> 23:55.326
of classic oil states,
they seem to respond to this

23:55.325 --> 24:01.385
and once you have an
authoritarian government with an

24:01.391 --> 24:07.341
oil export economy much of what
happens is ugly.

24:07.338 --> 24:14.388
A good part of the ugliness we
see in Russia these days,

24:14.390 --> 24:17.340
for example,
is made possible,

24:17.338 --> 24:23.078
some might say inevitable,
by its powerful export

24:23.075 --> 24:28.135
resources in petroleum and
natural gas.

24:28.140 --> 24:36.130
The land lock trap,
and here the classic case that

24:36.125 --> 24:45.205
will concern us will be Bolivia,
where we'll do a case two weeks

24:45.208 --> 24:51.528
from now about trying to improve
water resources in a major

24:51.528 --> 24:57.368
Bolivian city,
and being land locked is a bad

24:57.365 --> 24:58.265
thing.

24:58.269 --> 25:03.259
It's not hard to capture the
intuition of that because

25:03.255 --> 25:08.795
commerce with distant states
historically is largely done by

25:08.804 --> 25:14.734
marine transportation and absent
ports of your own you depend on

25:14.730 --> 25:19.820
ports of other countries,
so that, for example,

25:19.818 --> 25:24.768
Switzerland depends on Italian
and German ports,

25:24.769 --> 25:33.839
and Uganda or Rwanda would
depend on Kenyan ports,

25:33.838 --> 25:40.998
and it's probably a better idea
to depend on port systems like

25:40.997 --> 25:44.497
those of Italy,
or Germany, than like those of

25:44.497 --> 25:46.437
Kenya because they're far more
developed.

25:46.440 --> 25:48.990
But there's another side to
this story,

25:48.990 --> 25:55.160
which is that,
as Collier points out,

25:55.160 --> 25:59.490
having rich countries for
neighbors means you have large

25:59.488 --> 26:03.578
markets which don't require
ocean going shipping,

26:03.578 --> 26:09.138
so that, for example,
Germany and Italy are not just

26:09.135 --> 26:15.235
in the way of exports from
Switzerland but become markets

26:15.237 --> 26:21.227
for those exports and breed a
great deal of wealth.

26:21.230 --> 26:27.850
Indeed Collier shows that a 1%
increase in GDP per capita in a

26:27.847 --> 26:34.137
neighboring state correlates
generally with about .4% of an

26:34.140 --> 26:39.240
increase in GDP in the land
locked country.

26:39.240 --> 26:41.960
We're almost done here.

26:41.960 --> 26:51.020
The last one is bad states are
really bad for economies.

26:51.019 --> 26:53.749
This one is a no-brainer.

26:53.750 --> 27:00.100
There are two main ways for
states to be bad.

27:00.098 --> 27:07.668
By being weak and unable to
enforce the rule of law,

27:07.670 --> 27:13.720
tune into tonight's 6:30 world
news,

27:13.720 --> 27:20.730
and I prophesy five days in
advance that there will be an

27:20.727 --> 27:27.107
account of death and destruction
in Afghanistan,

27:27.108 --> 27:33.328
where the Taliban challenged
the state for control of

27:33.325 --> 27:40.725
territory and our soldiers try
to bring a degree of order under

27:40.734 --> 27:45.874
almost impossible conditions;
so weak states,

27:45.866 --> 27:49.426
failed states,
the famous case of Somalia with

27:49.430 --> 27:52.360
its pirates would be another
case.

27:52.358 --> 27:58.148
Iraq after the--after our
intervention was for a period a

27:58.148 --> 28:04.658
failed state and it gives every
indication of remaining either a

28:04.662 --> 28:11.602
failed state or a--
why don't I not prophesy about

28:11.597 --> 28:14.017
Iraq;
I don't need to have a dog in

28:14.016 --> 28:14.636
that fight.

28:14.640 --> 28:20.230
The other bad government story
is kleptocracy,

28:20.230 --> 28:24.990
and where the government or the
elites at the top of the

28:24.990 --> 28:30.530
government use it as a means for
collecting rent from the rest of

28:30.530 --> 28:31.570
society.

28:31.568 --> 28:35.838
It is extraordinarily
destructive to the economy

28:35.837 --> 28:41.377
because it takes away all the
conditions which allow people to

28:41.377 --> 28:46.277
make investments and execute
business projects and sell

28:46.282 --> 28:51.102
products in a sufficiently
predictable way to grow the

28:51.096 --> 28:52.546
economy.

28:52.548 --> 29:00.178
The other clip you're about to
see is Paul Collier himself in a

29:00.179 --> 29:05.339
TED talk explaining,
no doubt better than I can,

29:05.344 --> 29:09.844
what it is that The Bottom
Billion is about.

29:09.838 --> 29:48.918
I look forward to seeing you on
Wednesday.

29:48.920 --> 29:50.540
Paul Collier:
So can we dare to be

29:50.537 --> 29:51.047
optimistic?

29:51.048 --> 29:54.648
Well the thesis of The
Bottom Billion is that a

29:54.653 --> 29:58.203
billion people have been stuck
living in economies that have

29:58.196 --> 30:02.806
been stagnate for forty years,
and hence, diverging from the

30:02.808 --> 30:04.278
rest of mankind.

30:04.278 --> 30:07.438
So the real question to pose is
not "can we be

30:07.440 --> 30:10.160
optimistic,"
it's "how can we give

30:10.157 --> 30:13.127
credible hope to that billion
people?"

30:13.130 --> 30:16.530
That, to my mind,
is the fundamental challenge

30:16.531 --> 30:18.121
now of development.

30:18.118 --> 30:23.628
What I'm going to offer you is
a recipe,

30:23.630 --> 30:26.660
a combination,
of the two forces that changed

30:26.663 --> 30:30.013
the world for good,
which is the alliance of

30:30.005 --> 30:33.195
compassion and enlightened self
interest.

30:33.200 --> 30:39.540
Compassion because a billion
people are living in societies

30:39.542 --> 30:43.702
that have not offered credible
hope.

30:43.700 --> 30:47.430
That is a human tragedy.

30:47.430 --> 30:51.520
Enlightened self interest
because if that economic

30:51.520 --> 30:55.530
divergence continues for another
forty years,

30:55.529 --> 31:01.359
combined with social
integration globally,

31:01.358 --> 31:04.498
it will build a nightmare for
our children.

31:04.500 --> 31:08.690
We need compassion to get
ourselves started,

31:08.688 --> 31:14.238
and enlightened self interest
to get ourselves serious.

31:14.240 --> 31:18.130
That's the alliance that
changes the world.

31:18.130 --> 31:23.250
So what does it mean to get
serious about providing hope for

31:23.248 --> 31:25.068
the bottom billion?

31:25.069 --> 31:27.689
What can we actually do?

31:27.690 --> 31:33.830
Well a good guide is to think
what did we do last time the

31:33.825 --> 31:40.275
rich world got serious about
developing another region of the

31:40.282 --> 31:41.362
world?

31:41.358 --> 31:43.438
That gives us,
it turns out,

31:43.443 --> 31:46.843
quite a good clue,
except you have to go back

31:46.840 --> 31:48.540
quite a long time.

31:48.538 --> 31:53.148
The last time the rich world
got serious about developing

31:53.148 --> 31:56.358
another region was in the late
1940s.

31:56.358 --> 32:01.968
The rich world is you,
America, and the region that

32:01.969 --> 32:07.129
needed to be developed was my
world, Europe.

32:07.130 --> 32:09.220
It was post-war Europe.

32:09.220 --> 32:11.680
Why did America get serious?

32:11.680 --> 32:17.080
It wasn't just compassion for
Europe, though there was that.

32:17.078 --> 32:22.478
It was you knew you had to,
because in the late 1940s,

32:22.480 --> 32:26.010
country after country in
central Europe was falling into

32:26.007 --> 32:29.777
the Soviet block,
and so you knew you had no

32:29.781 --> 32:30.551
choice.

32:30.548 --> 32:33.928
Europe had to be dragged into
economic development.

32:33.930 --> 32:37.390
What did you do last time you
got serious?

32:37.390 --> 32:41.270
Well yes, you had a big aid
program, thank you very much,

32:41.272 --> 32:44.392
that was Marshall Aid,
we need to do it again,

32:44.393 --> 32:46.893
and aid is part of the
solution.

32:46.890 --> 32:48.790
But what else did you do?

32:48.788 --> 32:54.868
Well you tore up your trade
policy and totally reversed it.

32:54.868 --> 32:58.828
Before the war,
America had been highly

32:58.830 --> 33:03.400
protectionist;
after the war you opened your

33:03.404 --> 33:06.584
markets to Europe,
you dragged Europe into the

33:06.583 --> 33:08.703
then global economy,
which was your economy,

33:08.701 --> 33:11.581
and you institutionalized that
trade globalization through

33:11.580 --> 33:14.360
founding the General Agreement
on Tariffs and Trade;

33:14.358 --> 33:17.308
so total reversal of trade
policy.

33:17.309 --> 33:19.439
Did you do anything else?

33:19.440 --> 33:22.220
Yes, you totally reversed your
security policy.

33:22.220 --> 33:26.130
Before the war your security
policy had been isolationist;

33:26.130 --> 33:28.790
after the war,
you tear that up,

33:28.790 --> 33:33.600
you put 100,000 troops in
Europe for over forty years;

33:33.598 --> 33:37.618
so total reversal of security
policy.

33:37.619 --> 33:38.999
Anything else?

33:39.000 --> 33:43.540
Yes, you tear up the eleventh
commandment: national

33:43.538 --> 33:44.808
sovereignty.

33:44.808 --> 33:48.578
Before the war you treated
national sovereignty as so

33:48.583 --> 33:53.013
sacrosanct that you weren't even
willing to join the League of

33:53.009 --> 33:54.889
Nations;
after the war,

33:54.886 --> 33:58.586
you found the United Nations,
you found the Organization for

33:58.593 --> 34:00.513
Economic Cooperation and
Development,

34:00.509 --> 34:03.929
you found the IMF,
you encouraged Europe to create

34:03.925 --> 34:07.505
the European Community;
all systems for mutual

34:07.508 --> 34:09.178
government support.

34:09.179 --> 34:16.259
That is still the waterfront of
effective policies--aid,

34:16.264 --> 34:20.134
trade, security,
governance.

34:20.130 --> 34:23.050
Of course the details of policy
are going to be different

34:23.048 --> 34:25.028
because the challenge is
different,

34:25.030 --> 34:28.960
it's not rebuilding Europe,
and it's reversing the

34:28.961 --> 34:34.261
divergence of the bottom billion
so that they actually catch up.

34:34.260 --> 34:36.970
Is that easier or harder?

34:36.969 --> 34:41.659
We need to be at least as
serious as we were then.

34:41.659 --> 34:47.899
Now today I'm going to take
just one of those four,

34:47.900 --> 34:51.080
I'm going to take the one that
sounds the weakest,

34:51.079 --> 34:54.699
the one that's just motherhood
and apple pie:

34:54.699 --> 34:57.029
governance;
mutual systems of support for

34:57.025 --> 35:00.065
governance,
and I'm going to show you one

35:00.065 --> 35:04.075
idea and how we could do
something to strengthen

35:04.079 --> 35:07.969
governance,
and I'm going to show that that

35:07.974 --> 35:10.424
is enormously important now.

35:10.420 --> 35:17.810
The opportunity we're going to
look to is a genuine basis for

35:17.809 --> 35:23.849
optimism about the bottom
billion, and that is the

35:23.846 --> 35:26.306
commodity booms.

35:26.309 --> 35:31.599
The commodity booms are pumping
unprecedented amounts of money

35:31.596 --> 35:36.446
into many, though not all,
of the countries of the bottom

35:36.449 --> 35:37.489
billion.

35:37.489 --> 35:42.619
Partly they're pumping money in
because commodity prices are

35:42.623 --> 35:47.803
high, but it's not just that;
there's also a range of new

35:47.804 --> 35:49.004
discoveries.

35:49.000 --> 35:53.510
Uganda has just discovered oil
at about the most disastrous

35:53.505 --> 35:55.055
location on earth.

35:55.059 --> 35:59.809
Ghana's discovered oil;
Guinea has got a huge new

35:59.809 --> 36:03.379
exploitation of iron ore coming
out of the ground;

36:03.380 --> 36:05.820
so a mass of new discoveries.

36:05.820 --> 36:11.180
Between them,
these new revenue flows dwarf

36:11.175 --> 36:11.935
aid.

36:11.940 --> 36:16.490
Just to give you one example,
and gold ore alone is getting

36:16.489 --> 36:19.939
$50 billion dollars a year in
oil revenue.

36:19.940 --> 36:23.320
The entire aid flows to the
sixty countries of the bottom

36:23.322 --> 36:25.622
billion last year were $34
billion,

36:25.619 --> 36:29.829
so the flow of resources from
the commodity booms to the

36:29.831 --> 36:32.821
bottom billion are without
precedent.

36:32.820 --> 36:36.430
There's the optimism.

36:36.429 --> 36:41.309
The question is how is it going
to help their development?

36:41.309 --> 36:44.639
It's a huge opportunity for
transformation of development.

36:44.639 --> 36:46.319
Will it be taken?

36:46.320 --> 36:50.030
So here comes a bit of science,
and this is a bit of science

36:50.027 --> 36:53.607
I've done since The Bottom
Billion, so it's new.

36:53.610 --> 36:57.570
I've looked to see what is the
relationship between higher

36:57.570 --> 37:01.320
commodity prices of exports and
the growth of commodity

37:01.322 --> 37:04.802
exporting countries,
and I've looked globally.

37:04.800 --> 37:07.170
I've taken all the countries in
the world for the last forty

37:07.168 --> 37:09.198
years,
and looked to see what the

37:09.195 --> 37:14.555
relationship is,
and so the short run--the first

37:14.563 --> 37:19.323
five to seven years is just
great.

37:19.320 --> 37:22.980
In fact its hunky dory,
everything goes up.

37:22.980 --> 37:27.590
You get more money because your
terms of trade have improved,

37:27.590 --> 37:31.200
but also that drives up output
across the board,

37:31.202 --> 37:33.972
so GDP goes up a lot,
fantastic.

37:33.969 --> 37:35.469
That's the short run.

37:35.469 --> 37:37.909
How about the long run?

37:37.909 --> 37:43.349
Come back fifteen years
later--well the short run it's

37:43.347 --> 37:48.477
hunky dory, but the long run
it's humpty dumpty.

37:48.480 --> 37:52.050
You go up in the short run,
but then most societies

37:52.045 --> 37:56.465
historically have ended up worse
than if they'd had no booms at

37:56.469 --> 37:57.039
all.

37:57.039 --> 38:01.099
That is not a forecast about
how commodity prices go,

38:01.099 --> 38:03.179
it's a forecast of the
consequences,

38:03.179 --> 38:08.449
the long-term consequences for
growth of an increase in prices.

38:08.449 --> 38:11.429
What goes wrong?

38:11.429 --> 38:14.289
Why is there this resource
curse, as it's called?

38:14.289 --> 38:18.079
Again, I looked at that,
and it turns out that the

38:18.079 --> 38:21.559
critical issue is the level of
goverannce,

38:21.559 --> 38:25.579
the initial level of economic
governance when the resource

38:25.581 --> 38:26.641
booms accrue.

38:26.639 --> 38:29.469
In fact, if you've got good
enough governance,

38:29.474 --> 38:31.244
there is no resource boom.

38:31.239 --> 38:35.039
You go up in the short term and
then you go up even more in the

38:35.043 --> 38:35.783
long term.

38:35.780 --> 38:38.060
That's Norway,
the richest country in Europe,

38:38.063 --> 38:39.833
it's Australia,
and it's Canada.

38:39.829 --> 38:44.409
The resource curse is entirely
confined to countries below a

38:44.411 --> 38:46.431
threshold of governance.

38:46.429 --> 38:49.699
They still go up in the short
run, that's what we see across

38:49.695 --> 38:51.795
in the bottom billion at the
moment;

38:51.800 --> 38:55.550
the best growth rates they've
had ever.

38:55.550 --> 38:59.320
The question is whether the
short run will persist.

38:59.320 --> 39:03.750
We've got governments
historically over the last forty

39:03.751 --> 39:05.531
years;
it hasn't.

39:05.530 --> 39:09.000
There's countries like Nigeria,
which are worse off than if

39:09.001 --> 39:10.381
they'd never had oil.

39:10.380 --> 39:15.950
There's a threshold level above
which you go up in the long

39:15.945 --> 39:21.125
term, below which you go down,
just a benchmark of that

39:21.126 --> 39:22.466
threshold.

39:22.469 --> 39:26.659
It's about the governance level
of Portugal in the mid-1980s.

39:26.659 --> 39:30.609
The question is,
is the bottom billion above or

39:30.612 --> 39:32.592
below that threshold?

39:32.590 --> 39:37.540
Now there's one big change
since the commodity booms of the

39:37.539 --> 39:41.379
1970s, and that is the spread of
democracy.

39:41.380 --> 39:44.760
I thought maybe that is the
thing which has transformed

39:44.764 --> 39:46.964
governance in the bottom
billion.

39:46.960 --> 39:49.600
Maybe we can be more optimistic
because of the spread of

39:49.603 --> 39:50.183
democracy.

39:50.179 --> 39:51.569
So I looked.

39:51.570 --> 39:56.420
Democracy does have significant
effects, and unfortunately,

39:56.416 --> 39:57.916
they're adverse.

39:57.920 --> 40:02.430
Democracies make even more of a
mess of these resource booms

40:02.434 --> 40:03.894
than autocracies.

40:03.889 --> 40:07.109
At that stage I just wanted to
abandon the research,

40:07.110 --> 40:11.450
but it turns out that democracy
is a little bit more complicated

40:11.452 --> 40:14.342
than that,
because there are two distinct

40:14.340 --> 40:15.800
aspects of democracy.

40:15.800 --> 40:19.240
There's electoral competition,
which determines how you

40:19.239 --> 40:21.529
acquire power,
and there's checks and

40:21.532 --> 40:24.592
balances, which determine how
you use power.

40:24.590 --> 40:28.710
It turns out that electoral
competition is the thing that's

40:28.706 --> 40:33.336
doing the damage with democracy,
whereas strong checks and

40:33.344 --> 40:36.454
balances makes resource booms
good.

40:36.449 --> 40:39.759
And so what the countries of
the bottom billion need is very

40:39.762 --> 40:41.392
strong checks and balances.

40:41.389 --> 40:45.339
They haven't got them;
they got instant democracy in

40:45.342 --> 40:48.762
the 1990s, elections without
checks and balances.

40:48.760 --> 40:53.800
How can we help improve
governments and introduce checks

40:53.804 --> 40:55.184
and balances?

40:55.179 --> 40:57.699
In all of the societies of the
bottom billion,

40:57.697 --> 41:00.267
there are intense struggles to
do just that.

41:00.268 --> 41:05.638
The simple proposal is that we
should have some international

41:05.644 --> 41:08.494
standards,
which will be voluntary,

41:08.490 --> 41:12.700
that we should spell out the
key decision points that need to

41:12.695 --> 41:17.105
be taken in order for it to
harness these resource revenues.

41:17.110 --> 41:20.730
We know these international
standards work because we've

41:20.733 --> 41:21.923
already got one.

41:21.920 --> 41:24.240
It's called the Extractive
Industries Transparency

41:24.235 --> 41:24.845
Initiative.

41:24.849 --> 41:29.099
That is the very simple idea
that governments should report

41:29.097 --> 41:32.317
to their citizens what revenues
they have.

41:32.320 --> 41:37.490
No sooner was it proposed than
reformers in Nigeria adopted it,

41:37.494 --> 41:41.924
pushed it, and published the
revenues in the paper.

41:41.920 --> 41:45.380
Nigerian newspaper circulation
spiked, people wanted to know

41:45.376 --> 41:48.656
what their government was
getting in terms of revenue.

41:48.659 --> 41:50.909
We know it works.

41:50.909 --> 41:55.689
What would the content be of
these international standards?

41:55.690 --> 42:01.110
I can't go through all of them,
but I'll give you an example.

42:01.110 --> 42:05.840
The first is how to take the
resources out of the ground.

42:05.840 --> 42:08.820
The economic process is taking
the resources out of the ground

42:08.824 --> 42:10.884
and putting assets on top of the
ground.

42:10.880 --> 42:14.710
The first step in that is
selling the rights to resource

42:14.713 --> 42:15.623
extraction.

42:15.619 --> 42:18.969
You know how rights to resource
extraction are being sold at the

42:18.967 --> 42:22.047
moment, how they've been sold
over the last forty years?

42:22.050 --> 42:25.820
A company flies in,
does a deal with the minister,

42:25.820 --> 42:28.810
and that's great for the
company and it's quite often

42:28.806 --> 42:32.666
great for the minister,
and it's not great for the

42:32.668 --> 42:33.488
country.

42:33.489 --> 42:37.129
There's a very simple
institutional technology which

42:37.126 --> 42:40.186
can transform that,
and it's called verified

42:40.192 --> 42:41.122
auctions.

42:41.119 --> 42:49.729
The public agency with the
greatest expertise on earth is,

42:49.730 --> 42:51.640
of course, the treasury,
that is the British Treasury,

42:51.639 --> 42:54.739
and the British Treasury
decided that it would sell the

42:54.744 --> 42:57.854
rights to third generation
mobile phones by working out

42:57.851 --> 42:59.751
what those rights were worth.

42:59.750 --> 43:02.690
It worked out they were worth 2
billion pounds.

43:02.690 --> 43:05.480
Just in time,
a set of economists got there

43:05.478 --> 43:08.198
and said, "Why not try an
auction?

43:08.199 --> 43:09.689
It'll reveal the value."

43:09.690 --> 43:12.800
It went for 20 billion pounds
through auction.

43:12.800 --> 43:15.790
If the British Treasury can be
out by a factor of ten,

43:15.793 --> 43:19.073
think what the ministry of
finance in Sierra Leone is going

43:19.072 --> 43:19.922
to be like.

43:19.920 --> 43:23.010
When I put that out to the
president of Sierra Leone,

43:23.010 --> 43:26.300
the next day he asked the World
Bank to send him a team to give

43:26.300 --> 43:28.370
expertise on how to conduct
auctions.

43:28.369 --> 43:32.829
There are five such decision
points;

43:32.829 --> 43:35.409
each one needs an international
standard.

43:35.409 --> 43:40.649
If we could do it,
we would change the world.

43:40.650 --> 43:44.490
We would be helping the
reformers in these societies who

43:44.485 --> 43:46.435
are struggling for change.

43:46.440 --> 43:49.070
That's our modest role.

43:49.070 --> 43:52.630
We cannot change these
societies, but we can help the

43:52.632 --> 43:56.342
people in these societies,
who are struggling and usually

43:56.340 --> 43:59.440
failing because the odds are so
stacked against them.

43:59.440 --> 44:05.580
Yet, we've not got these rules.

44:05.579 --> 44:09.169
If you think about it,
the cost of promulgating

44:09.173 --> 44:12.303
international rules is zilch,
nothing.

44:12.300 --> 44:15.500
Why on earth are they not there?

44:15.500 --> 44:20.540
I realized that the reason
they're not there is that until

44:20.543 --> 44:25.323
we have a critical mass of
informed citizens in our own

44:25.322 --> 44:29.572
societies,
politicians will get away with

44:29.567 --> 44:33.497
gestures;
that unless we have an informed

44:33.501 --> 44:38.561
society what politicians do,
especially in relation to

44:38.563 --> 44:43.433
Africa, is gestures,
things that look good but don't

44:43.434 --> 44:44.394
work.

44:44.389 --> 44:48.719
So I realized we had to go
through the business of building

44:48.724 --> 44:50.524
an informed citizenry.

44:50.518 --> 44:54.018
That's why I broke all the
professional rules of conduct

44:54.018 --> 44:57.838
for an economist and I wrote an
economics book that you could

44:57.836 --> 44:59.106
read on a beach.

44:59.110 --> 45:04.470
However, I have to say,
the process of communication

45:04.474 --> 45:10.784
does not come naturally to me,
this is why I'm on this stage,

45:10.784 --> 45:13.104
but it's alarming.

45:13.099 --> 45:18.759
I grew up in a culture of
self-effacement.

45:18.760 --> 45:26.200
My wife showed me a blog
comment on one of my last talks,

45:26.199 --> 45:30.549
and the blog comment said,
"Collier is not

45:30.550 --> 45:35.670
charismatic,
but his arguments are

45:35.668 --> 45:38.838
compelling."

45:38.840 --> 45:48.130
If you agree with that
sentiment and if you agree that

45:48.128 --> 45:56.008
we need a critical mass of
informed citizenry,

45:56.014 --> 46:02.504
you will realize that I need
you.

46:02.500 --> 46:05.150
Please become ambassadors.

46:05.150 --> 46:11.620
Thank you.

46:11.619 --> 46:13.389
Jim Alexander:
Professor Rae will be back

46:13.393 --> 46:14.803
on Wednesday and we'll see you
then.

46:14.800 --> 46:20.000