Video Transcript: The Bottom Billion

So, can we dare to be optimistic? Well, the thesis of "The Bottom Billion" is that  a billion people have been stuck living in economies that have been stagnant for 40 years, and hence diverging from the rest of mankind. And so, the real  question to pose is not, "Can we be optimistic?" It's, "How can we give credible  hope to that billion people?" That, to my mind, is the fundamental challenge now of development. What I'm going to offer you is a recipe, a combination of the two forces that changed the world for good, which is the alliance of compassion and  enlightened self-interest. Compassion, because a billion people are living in  societies that have not offered credible hope. That is a human tragedy.  Enlightened self-interest, because if that economic divergence continues for  another 40 years, combined with social integration globally, it will build a  nightmare for our children. We need compassion to get ourselves started, and  enlightened self-interest to get ourselves serious. That's the alliance that  changes the world. So, what does it mean to get serious about providing hope  for the bottom billion? What can we actually do? Well, a good guide is to think,  "What did we do last time the rich world got serious about developing another  region of the world?" That gives us, it turns out, quite a good clue, except you  have to go back quite a long time. The last time the rich world got serious about  developing another region was in the late 1940s. The rich world was you,  America, and the region that needed to be developed was my world, Europe.  That was post-War Europe. Why did America get serious? It wasn't just  compassion for Europe, though there was that. It was that you knew you had to,  because, in the late 1940s, country after country in Central Europe was falling  into the Soviet bloc, and so you knew you'd no choice. Europe had to be  dragged into economic development. So, what did you do, last time you got  serious? Well, yes, you had a big aid program. Thank you very much. That was  Marshall aid: we need to do it again. Aid is part of the solution. But what else did you do? Well, you tore up your trade policy, and totally reversed it. Before the  war, America had been highly protectionist. After the war, you opened your  markets to Europe, you dragged Europe into the then-global economy, which  was your economy, and you institutionalized that trade liberalization through  founding the General Agreement on Tariffs and Trade. So, total reversal of trade  policy. Did you do anything else? Yes, you totally reversed your security policy.  Before the war, your security policy had been isolationist. After the war, you tear  that up, you put 100,000 troops in Europe for over 40 years. So, total reversal of security policy. Anything else? Yes, you tear up the "Eleventh Commandment" --  national sovereignty. Before the war, you treated national sovereignty as so  sacrosanct that you weren't even willing to join the League of Nations. After the  war, you found the United Nations, you found the Organization for Economic  Cooperation and Development, you found the IMF, you encouraged Europe to  create the European Community -- all systems for mutual government support.  That is still the waterfront of effective policies: aid, trade, security, governments. 

Of course, the details of policy are going to be different, because the challenge  is different. It's not rebuilding Europe, it's reversing the divergence for the bottom billion, so that they actually catch up. Is that easier or harder? We need to be at  least as serious as we were then. Now, today I'm going to take just one of those  four. I'm going to take the one that sounds the weakest, the one that's just  motherhood and apple pie -- governments, mutual systems of support for  governments -- and I'm going to show you one idea in how we could do  something to strengthen governance, and I'm going to show you that that is  enormously important now. The opportunity we're going to look to is a genuine  basis for optimism about the bottom billion, and that is the commodity booms.  The commodity booms are pumping unprecedented amounts of money into  many, though not all, of the countries of the bottom billion. Partly, they're  pumping money in because commodity prices are high, but it's not just that.  There's also a range of new discoveries. Uganda has just discovered oil, in  about the most disastrous location on Earth; Ghana has discovered oil; Guinea  has got a huge new exploitation of iron ore coming out of the ground. So, a  mass of new discoveries. Between them, these new revenue flows dwarf aid.  Just to give you one example: Angola alone is getting $50 billion a year in oil  revenue. The entire aid flows to the 60 countries of the bottom billion last year  were 34 billion. So, the flow of resources from the commodity booms to the  bottom billion are without precedent. So there's the optimism. The question is,  how is it going to help their development? It's a huge opportunity for  transformational development. Will it be taken? So, here comes a bit of science,  and this is a bit of science I've done since "The Bottom Billion," so it's new. I've  looked to see what is the relationship between higher commodity prices of  exports, and the growth of commodity-exporting countries. And I've looked  globally, I've taken all the countries in the world for the last 40 years, and looked  to see what the relationship is. And the short run -- say, the first five to seven  years -- is just great. In fact, it's hunky dory: everything goes up. You get more  money because your terms of trade have improved, but also that drives up  output across the board. So GDP goes up a lot -- fantastic! That's the short run.  And how about the long run? Come back 15 years later. Well, the short run, it's  hunky dory, but the long run, it's humpty dumpty. You go up in the short run, but  then most societies historically have ended up worse than if they'd had no  booms at all. That is not a forecast about how commodity prices go; it's a  forecast of the consequences, the long-term consequences, for growth of an  increase in prices. So, what goes wrong? Why is there this "resource curse," as  it's called? And again, I've looked at that, and it turns out that the critical issue is  the level of governance, the initial level of economic governance, when the  resource booms accrue. In fact, if you've got good enough governance, there is  no resource boom. You go up in the short term, and then you go up even more  in the long term. That's Norway, the richest country in Europe. It's Australia. It's 

Canada. The resource curse is entirely confined to countries below a threshold  of governance. They still go up in the short run. That's what we're seeing across  the bottom billion at the moment. The best growth rates they've had -- ever. And  

the question is whether the short run will persist. And with bad governance  historically, over the last 40 years, it hasn't. It's countries like Nigeria, which are  worse off than if they'd never had oil. So, there's a threshold level above which  you go up in the long term, and below which you go down. Just to benchmark  that threshold, it's about the governance level of Portugal in the mid 1980s. So,  the question is, are the bottom billion above or below that threshold? Now,  there's one big change since the commodity booms of the 1970s, and that is the spread of democracy. So I thought, well, maybe that is the thing which has  transformed governance in the bottom billion. Maybe we can be more optimistic  because of the spread of democracy. So, I looked. Democracy does have  significant effects -- and unfortunately, they're adverse. Democracies make even more of a mess of these resource booms than autocracies. At that stage I just  wanted to abandon the research, but -- it turns out that democracy is a little bit  more complicated than that. Because there are two distinct aspects of  democracy: there's electoral competition, which determines how you acquire  power, and there are checks and balances, which determine how you use  power. It turns out that electoral competition is the thing that's doing the damage with democracy, whereas strong checks and balances make resource booms  good. And so, what the countries of the bottom billion need is very strong checks and balances. They haven't got them. They got instant democracy in the 1990s:  elections without checks and balances. How can we help improve governance  and introduce checks and balances? In all the societies of the bottom billion,  there are intense struggles to do just that. The simple proposal is that we should have some international standards, which will be voluntary, but which would  spell out the key decision points that need to be taken in order to harness these  resource revenues. We know these international standards work because we've  already got one. It's called the Extractive Industries Transparency Initiative. That is the very simple idea that governments should report to their citizens what  revenues they have. No sooner was it proposed than reformers in Nigeria  adopted it, pushed it and published the revenues in the paper. Nigerian  newspapers circulations spiked. People wanted to know what their government  was getting in terms of revenue. So, we know it works. What would the content  be of these international standards? I can't go through all of them, but I'll give  you an example. The first is how to take the resources out of the ground -- the  economic processes, taking the resources out of the ground and putting assets  on top of the ground. And the first step in that is selling the rights to resource  extraction. You know how rights to resource extraction are being sold at the  moment, how they've been sold over the last 40 years? A company flies in, does a deal with a minister. And that's great for the company, and it's quite often great

for the minister -- and it's not great for their country. There's a very simple  institutional technology which can transform that, and it's called verified  auctions. The public agency with the greatest expertise on Earth is of course the treasury -- that is, the British Treasury. And the British Treasury decided that it  would sell the rights to third-generation mobile phones by working out what  those rights were worth. They worked out they were worth two billion pounds.  Just in time, a set of economists got there and said, "Why not try an auction? It'll reveal the value." It went for 20 billion pounds through auction. If the British  Treasury can be out by a factor of 10, think what the ministry of finance in Sierra Leone is going to be like. When I put that to the President of Sierra Leone, the  next day he asked the World Bank to send him a team to give expertise on how  to conduct auctions. There are five such decision points; each one needs an  international standard. If we could do it, we would change the world. We would  be helping the reformers in these societies, who are struggling for change.  That's our modest role. We cannot change these societies, but we can help the  people in these societies who are struggling and usually failing, because the  odds are so stacked against them. And yet, we've not got these rules. If you  think about it, the cost of promulgating international rules is zilch -- nothing.  Why on Earth are they not there? I realized that the reason they're not there  is that until we have a critical mass of informed citizens in our own societies,  politicians will get away with gestures. That unless we have an informed society, what politicians do, especially in relation to Africa, is gestures: things that look  good, but don't work. And so I realized we had to go through the business of  building an informed citizenry. That's why I broke all the professional rules of  conduct for an economist, and I wrote an economics book that you could read  on a beach. However, I have to say, the process of communication does not  come naturally to me. This is why I'm on this stage, but it's alarming. I grew up in a culture of self-effacement. My wife showed me a blog comment on one of my  last talks, and the blog comment said, "Collier is not charismatic -- but his  arguments are compelling." If you agree with that sentiment, and if you agree  that we need a critical mass of informed citizenry, you will realize that I need  you. Please, become ambassadors. Thank you.