The Bottom Billion Part 5







Chapter 5: Bad Governance in a Small Country

Governance and economic policies help to shape economic performance, but there is an asymmetry in the consequences of getting them right and getting them wrong. Excellent governance and economic policies can help the growth process but these is a ceiling to feasible growth rates at around 10%: economies just cannot grow much faster than this no matter what governments do. By contrast, terrible governance and policies can destroy an economy with alarming speed. For example, President Robert Mugabe must take responsibility for the economic collapse in Zimbabwe since 1998, culminating in inflation of over 1,000% a year. That decline is visible from the moment you set foot in the country and walk through its deserted international airport. Because of this asymmetry, the implementation of restraints is likely to be even more important than the promotion of government effectiveness.

Do failing states turn around of their own accord?

The preconditions for turnarounds

Incipient turnarounds

The costs of neglect: Why it matters for G8 policy

The typical failing state is going to go on failing for a long time. Does it matter? The whole topic of failing states is fashionable because people have an uneasy sense that it probably does matter. After 9/11 the US aid budget was increased by 50%, and the main impetus for it was the perceived need to fix failing states. In Part 4 you will see how, ironically, this is what aid is not going to do. But can we get beyond that inchoate sense that failing states are a problem? Can we actually quantify the costs of a failing state?

Remember, I have defined a failing state in terms of its bad policies and governance. The core of the cost is what results from these policy and governance failings for the economy of the country itself and for its neighbors. Lisa Chauvet and I decided to estimate a lower bound to these costs, leaving out a lot of the consequences of state failure that are legitimate objects of concern. For example, we omitted the security costs implied by an increased risk of civil war, and the human costs implied by avoidably high infant mortality. To give some sense of how much we left out, remember that in Chapter 2, I put a figure of around $64 billion for the typical cost to a region of a civil war. To avoid double counting of the cost of the traps, here I’m going to stick to the cost of a failing state that remains at peace.

To estimate the economic cost of being a failing state required yet another battery of techniques. This took time, and the pressure was building, since our work was being financed by a consortium of donors. Like many people in the policy world, they commissioned the work at the point where they realized they needed answers, and so they wanted the answers quickly. The policy world is deeply suspicious of the world of research, often for good reason – with this sort of work there is no “progress” in the sense of usable results until pretty late in the day. And it is risky, because sometimes the data turn out not to be adequate to answer the question, and so the whole effort is wasted. In this case, fortunately, we got results that were surprisingly robust.

The costs of a failing state build up year by year. The growth rate of the failing state is very sharply reduced – indeed, it is likely to be in absolute decline. And the growth of neighbors is also sharply reduced. Since failing states take such a long time to turn around, these costs continue way into the future. Economists routinely convert flows of future costs into a single number, which they term a “discounted present value.” We estimated that the cost of a single failing state over its entire history of failure, to itself and its neighbors, is around $100 billion. This is our lower-bound estimate of what a sustained turnaround is worth. It is a mesmerizingly large number, but then, the phenomenon we are considering is indeed dramatic: a world without failing states would be a transformed world. Is the figure ridiculous? I think that there is a good case for saying that it is too low, for it considers only the costs to the country itself and its neighbors.

To infer how rich countries value turnarounds, look at Iraq. The US-led military intervention in Iraq provides us with a rare opportunity to calculate what a key international actor regarded as the benefits to itself of one sustained turnaround. The purpose of the intervention was clearly stated as being regime change. The regime in Iraq was a classic example of a failing but politically secure state, so the costs of state failure could reasonably be seen as likely to be persistent. The military intervention in Iraq has already cost around $350 billion, but lets look at what the initial estimates were. Before the war began, costs of at least $100 billion could readily be forecast. The decision to intervene in Iraq implies expected benefits of intervention in excess of these anticipated costs. Further, the expected benefits of intervention to promote a turnaround depend upon the value of the turnaround, but this value has to be reduced by the probability that the desired turnaround will fail. If the turnaround has only a 50% chance of success, then the expected value of the intervention is only half the benefits of the turnaround. So we know that for the intervention in Iraq the expected value must exceed the expected costs of intervention, and so been valued at more than $100 billion. If the George W. Bush administration had applied any discount for the prospects that a new Iraqi regime would revert to state failure, the valuation placed on a successful turnaround would necessarily be higher than the costs of military intervention. Clearly, the US-led intervention in Iraq is unusual in many respects; as the costs escalate it looks increasingly like a mistake. But my point is not to try to make a cost-benefit analysis of intervention in Iraq, let alone consider its wider political context. Rather, it is to suggest that the value of a successful state turnaround to the international community is very large.

So if you support the Iraq war, you have to agree that the benefits of turning around a failing state are enormous. But the converse does not follow. If you are opposed to the war in Iraq, it most probably does not mean that you do not value turnarounds in failing states. It is more likely to mean that you are concerned about actual costs of what you regard as a doubtful military intervention. Pose the following question: how much would it have been worth to have Iraqis themselves throw out Saddam Hussein and install a stable replacement?

In Part 4 I am going to look at nonmilitary interventions to turn around failing states – essentially, interventions that support local efforts at change. Typically, intelligent external support is going to raise the chances of a turnaround, but any particular reform is nevertheless likely to fail. One way of thinking of this is that we can shorten the time that a failing state is stuck. These interventions are going to cost money. Whether they are worth the money depends upon how much they increase the chances of sustaining a turnaround, and how much a successful turnaround is worth. If turning around a failing state is anything like as valuable as I think it is – worth $100 billion to the region, and perhaps more than that to the rest of the world – even small improvements in probabilities are well worthwhile. As I will discuss later, Lisa and I think that we have found a nonmilitary intervention that becomes worth doing even if a successful turnaround is valued at only $7 billion. In other words, we think we have found a bargain, though the world is not yet doing it, at least not on any large scale.


Chapter 6: On Missing the Boat: The Marginalization of the Bottom Billion in the World Economy

All the people living in the countries of the bottom billion have been in one way or another of the traps that I have described in the preceding four chapters. 73% of them have been through civil war, 29% of them are in countries dominated by the politics of natural resource revenues, 30% are landlocked, resource-scarce, and in a bad neighborhood, and 76% have been through a prolonged period of bad governance and poor economic policies. Adding up these percentages, you will realize that some countries have been in more than one trap, either simultaneously or sequentially.

Trade and the bottom billion

Capital flows and the bottom billion

Migration and the bottom billion

Life in limbo: Out of the frying pan …



Chapter 7: Aid to the Rescue?

The story so far: a group of countries with nearly a billion people living in them have been caught in one or another of four traps. As a result, while the rest of the developing world has been growing at an unprecedented rate, they have stagnated or even declined. From time to time they have broken free of the traps, but the global economy is now making it much harder for them to follow the path taken by the more successful majority. As a result, even when free of the traps they sit in limbo, growing so slowly that they risk falling back into traps before they can reach a level of income that ensures safety.

Aid and the conflict trap

Aid and the natural resource trap

Aid and the trap of being landlocked

Aid and the trap of bad governance

Is aid part of the problem or part of the solution?

One of the bugbears of the political right is that aid is going into Swiss bank accounts. Sometimes it does; there are well-documented cases. But what is the general relationship? Is aid financing capital flight, as it is financing military spending? Again, in the end it is an empirical question, not something you can deduce from the first principles of an ideology. It’s easy to think of ways in which aid might leak out into capital flight; for example, the president just steals it. But there are also ways in which aid could reduce capital flight. It is true that for this you have to think a little bit harder, as the image of the president stuffing dollars into his briefcase comes more easily, but here is an alternative mechanism. Aid improves the opportunities for private investment, and so money that otherwise would have fled the country gets invested inside it. That is evidently quite possible. The question is which predominates empirically.

For this project I teamed up again with Anke and Cathy. We had all worked on capital flight together twice before, and by now we knew how to control for two-way causation in interpreting the effects of aid. (I should note at this stage, we have had our work reviewed by anonymous referees for a professional journal and the comments have been sufficiently encouraging for us to continue the process of revision, but it has not yet been published.) Our results indicate that aid significantly reduced capital flight. This surprised us, probably because that powerful image of the president stuffing his briefcase had penetrated our minds too. In fact, it seems that aid makes private investment more attractive and so helps to keep capital in the country. Aid, however, is not the only answer to the problems of the bottom billion. In recent years it has probably been overemphasized, partly because it is the easiest thing for the Western world to do and partly because it fits so comfortably into a moral universe organized around the principles of sin and expiation. That overemphasis, which comes from the left, has produced a predictable backlash from the right. Aid does have serious problems, and more especially serious limitations. Alone it will not be sufficient to turn the societies of the bottom billion around. But it is part of the solution rather than part of the problem. The challenge is to complement it with other actions.

Chapter 8: Military Intervention


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