Why did modernization? only occur in some regions of the world and not others?? 2. How have external actors affected developing countries’ ability to reduce domestic inequalities??Colli

CHAPTER 1

Falling Behind and Falling Apart: The Bottom Billion

The third world has shrunk. For forty years the development challenge has been a rich world of one billion people facing a poor world of five billion people. The Millennium Development Goals established by the United Nations, which are designed to track development progress through 2015, encapsulate this thinking. By 2015, however, it will be ap- parent that this way of conceptualizing development has become outdated. Most of the five billion, about 80 percent, live in countries that are indeed developing, often at amazing speed. The real challenge of development is that there is a group of countries at the bottom that are falling behind, and often falling apart.

The countries at the bottom coexist with the twenty-first century, but their reality is the fourteenth century: civil war, plague, ignorance. They are concentrated in Africa and Central Asia, with a scattering elsewhere. Even during the 1990s, in retrospect the golden decade between the end of the Cold War and 9/11, incomes in this group declined by 5 percent. We must learn to turn the familiar numbers upside down: a total of five billion people who are already prosperous, or at least are on track to be so, and one billion who are stuck at the bottom.

This problem matters, and not just to the billion people who are living and dying in fourteenth-century conditions. It matters to us. The twenty- first-century world of material comfort, global travel, and economic inter- dependence will become increasingly vulnerable to these large islands of

C o p y r i g h t 2 0 0 7 . O x f o r d U n i v e r s i t y P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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chaos. And it matters now. As the bottom billion diverges from an increas- ingly sophisticated world economy, integration will become harder, not easier.

And yet it is a problem denied, both by development biz and by develop- ment buzz. Development biz is run by the aid agencies and the companies that get the contracts for their projects. They will fight this thesis with the tenacity of bureaucracies endangered, because they like things the way they are. A definition of development that encompasses five billion people gives them license to be everywhere, or more honestly, everywhere but the bot- tom billion. At the bottom, conditions are rather rough. Every development agency has difficulty getting its staff to serve in Chad and Laos; the glamour postings are for countries such as Brazil and China. The World Bank has large offices in every major middle-income country but not a single person resident in the Central African Republic. So don’t expect the development biz to refocus voluntarily.

Development buzz is generated by rock stars, celebrities, and NGOs. To its credit, it does focus on the plight of the bottom billion. It is thanks to development buzz that Africa gets on the agenda of the G8. But inevitably, development buzz has to keep its messages simple, driven by the need for slogans, images, and anger. Unfortunately, although the plight of the bot- tom billion lends itself to simple moralizing, the answers do not. It is a problem that needs to be hit with several policies at the same time, some of them counterintuitive. Don’t look to development buzz to formulate such an agenda: it is at times a headless heart.

What of the governments of the countries at the bottom? The prevail- ing conditions bring out extremes. Leaders are sometimes psychopaths who have shot their way to power, sometimes crooks who have bought it, and sometimes brave people who, against the odds, are trying to build a better future. Even the appearance of modern government in these states is sometimes a façade, as if the leaders are reading from a script. They sit at the international negotiating tables, such as the World Trade Organiza- tion, but they have nothing to negotiate. The seats stay occupied even in the face of meltdown in their societies: the government of Somalia contin- ued to be officially “represented” in the international arena for years after Somalia ceased to have a functioning government in the country itself. So don’t expect the governments of the bottom billion to unite in formulating

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a practical agenda: they are fractured between villains and heroes, and some of them are barely there. For our future world to be livable the he- roes must win their struggle. But the villains have the guns and the money, and to date they have usually prevailed. That will continue unless we rad- ically change our approach.

All societies used to be poor. Most are now lifting out of it; why are oth- ers stuck? The answer is traps. Poverty is not intrinsically a trap, otherwise we would all still be poor. Think, for a moment, of development as chutes and ladders. In the modern world of globalization there are some fabulous ladders; most societies are using them. But there are also some chutes, and some societies have hit them. The countries at the bottom are an unlucky minority, but they are stuck.

Traps, and the Countries Caught in Them

Suppose your country is dirt poor, almost stagnant economically, and that few people are educated. You don’t have to try that hard to imagine this condition—our ancestors lived this way. With hard work, thrift, and intel- ligence, a society can gradually climb out of poverty, unless it gets trapped. Development traps have become a fashionable area of academic dispute, with a fairly predictable right-left divide. The right tends to deny the exis- tence of development traps, asserting that any country adopting good poli- cies will escape poverty. The left tends to see global capitalism as inherently generating a poverty trap.

The concept of a development trap has been around for a long time and is most recently associated with the work of the economist Jeffrey Sachs, who has focused on the consequences of malaria and other health prob- lems. Malaria keeps countries poor, and because they are poor the poten- tial market for a vaccine is not sufficiently valuable to warrant drug com- panies making the huge investment in research that is necessary. This book is about four traps that have received less attention: the conflict trap, the natural resources trap, the trap of being landlocked with bad neigh- bors, and the trap of bad governance in a small country. Like many devel- oping countries that are now succeeding, all the countries that are the fo- cus of this book are poor. Their distinctive feature is that they got caught in one or another of the traps. These traps are not inescapable, however,

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and over the years some countries have broken free of them and then started to catch up. Unfortunately, that process of catching up has itself recently stalled. Those countries that have only broken clear of the traps during the last decade have faced a new problem: the global market is now far more hostile to new entrants than it was in the 1980s. The coun- tries newly escaped from the traps may have missed the boat, finding themselves in a limbo-like world in which growth is constrained by exter- nal factors; this will be the theme in my discussion of globalization. When Mauritius escaped the traps in the 1980s it rocketed to middle-income levels; when neighboring Madagascar finally escaped the traps two de- cades later, there was no rocket.

Most countries have stayed clear of any of the traps that are the subject of this book. But countries with a combined population of around one bil- lion people have got caught in them. Underlying that statement are some definitions. For example, one of the traps involves being landlocked— although being landlocked is not sufficient to constitute the trap. But when is a country landlocked? You might think that such a matter is clear enough from an atlas. But what about Zaire, which after the ruinous reign of Presi- dent Mobutu understandably rebranded itself as the Democratic Republic of the Congo? It is virtually landlocked but has a tiny sliver of coast. And Sudan has some coast, but most of its people live far away from it.

In defining these traps I have had to draw lines somewhat arbitrarily, and this creates gray areas. Most developing countries are clearly heading toward success, and others are just as clearly heading toward what might be described as a black hole. For some, however, we really cannot tell. Per- haps Papua New Guinea is heading for success; I hope so, and that is how I have classified it. But there are some experts on Papua New Guinea who would shake their heads in disbelief at that. The judgment calls are in- evitably going to be open to challenge. But such challenges do not discredit the underlying thesis: that there is a black hole, and that many countries are indisputably heading into it, rather than being drawn toward success. You will learn more about the fine judgments as the book progresses. For the moment take it on trust that I have drawn the lines defensibly.

Given the way I have drawn the lines, as of 2006 there are around 980 million people living in these trapped countries. Since their populations are growing, by the time you read this the figure will be hovering around

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the one billion mark. Seventy percent of these people are in Africa, and most Africans are living in countries that have been in one or another of the traps. Africa is therefore the core of the problem. The rest of the world has spotted that. Think of how the international commissions on develop- ment have evolved. The first major development commission was estab- lished in 1970, led by a former prime minister of Canada. The Pearson Commission took a global focus on development problems. It was followed in 1980 by a commission led by a former chancellor of Germany. The Brandt Commission took the same global focus. By 2005, when Britain’s Tony Blair decided to launch a commission on development, the focus had shrunk to Africa: this was a commission for Africa, not for development. In 2006 President Horst Köhler of Germany decided that he too would have a development event. He could hardly just repeat Tony Blair—not another Commission for Africa in the very next year. So he called it a forum, but it was still a forum for Africa. In reality, however, Africa and the third world are not coterminous. South Africa, for example, is not among the bottom billion—it is manifestly not in the same desperate situation as Chad. Con- versely, much of landlocked Central Asia is disturbingly like Chad. So the countries of the bottom billion do not form a group with a convenient ge- ographic label. When I want to use a geographic label for them I describe them as “Africa +,” with the + being places such as Haiti, Bolivia, the Cen- tral Asian countries, Laos, Cambodia, Yemen, Burma, and North Korea. They all either are still in one of the traps or escaped too late.

I have identified fifty-eight countries that fall into this group, which highlights one typical feature—they are small. Combined, they have fewer people than either India or China. And since their per capita income is also very low, the income of the typical country is negligible, less than that of most rich-world cities. Because this is not company that countries are keen to be in, and because stigmatizing a country tends to create a self- fulfilling prophecy, I will not present a list of these countries. Rather, I will give plenty of examples in each of the traps.

So, how have the countries of the bottom billion been doing? First, consider how people live, or rather die. In the bottom billion average life expectancy is fifty years, whereas in the other developing countries it is sixty-seven years. Infant mortality—the proportion of children who die before their fifth birthday—is 14 percent in the bottom billion, whereas

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in the other developing countries it is 4 percent. The proportion of children with symptoms of long-term malnutrition is 36 percent in the bottom billion as against 20 percent for the other developing countries.

The Role of Growth in Development

Has this gap between the bottom billion and the rest of the developing world always been there, or has it come about because the bottom billion have been trapped? To find out, we have to disaggregate the statistics that have been used in the past to describe all the countries that we label as “developing.” Here’s a hypothetical example. Prosperia has a big economy that is growing at 10 percent, but the country has only a small population. Catastrophia is a small economy declining at 10 percent, but it has a large population. The usual approach—employed, for example, by the Interna- tional Monetary Fund (IMF) in its flagship publication World Economic

Outlook—is to average figures that relate to the size of a country’s econ- omy. On this approach, Prosperia’s large, growing economy skews the av- erage upward, and so in aggregate the two countries are described as growing. The problem is that this describes what is going on from the per- spective of the typical unit of income, not from the perspective of the typ- ical person. Most units of income are in Prosperia, but most people are in Catastrophia. If we want to describe what the typical person experiences in the countries of the bottom billion, we need to work with figures based not on a country’s income but on its population. Does it matter? Well, it does if the poorest countries are diverging from the rest, which is the the- sis of this book, because averaging by income dismisses the poorest coun- tries as unimportant. The experience of their people does not count for much precisely because they are poor—their income is negligible.

When we get the data appropriately averaged, what do we find? Those developing countries that are not part of the bottom billion—the middle four billion—have experienced rapid and accelerating growth in per capita income. Let’s take it decade by decade. During the 1970s they grew at 2.5 percent a year, hopeful but not remarkable. During the 1980s and 1990s their growth rate accelerated to 4 percent a year. During the first few years of the twenty-first century it accelerated again to over 4.5 percent. These growth rates may not sound sensational, but they are without precedent in

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history. They imply that children in these countries will grow up to have lives dramatically different from those of their parents. Even where people are still poor, these societies can be suffused with hope: time is on their side.

But how about the bottom billion? Let’s again take it decade by decade. During the 1970s their per capita income rose at 0.5 percent a year, so they were becoming slightly better off in absolute terms but at a rate that was likely to be barely perceptible. Given the high degree of volatility of individual incomes in these societies, the slight overall tendency to im- provement is likely to have been drowned by these individual risks. The overall tenor of the society will have been dominated by individual fears of falling rather than hope coming from society-wide progress. But in the 1980s the performance of the bottom billion got much worse, declining at 0.4 percent a year. In absolute terms, by the end of the 1980s they were back to where they had been in 1970. If you had been living in these soci- eties over that full sweep of twenty years, the only economic experience was of individual volatility: some people went up and some went down. There was no society-wide reason for hope. And then came the 1990s. This is now seen as the golden decade, between the end of the Cold War and 9/11—the decade of the cloudless sky and booming markets. It wasn’t so golden for the bottom billion: their rate of absolute decline ac- celerated to 0.5 percent a year. By the turn of the millennium they were therefore poorer than they had been in 1970.

Is this dismal performance just an artifact of the data? I think that, on the contrary, the genuine problems that afflict the gathering of economic data in the poorest countries are likely overall to have caused an underes- timate of their decline. For the countries that have really fallen apart, there are no usable data. For example, the estimated decline among the bottom- billion countries during the 1990s does not include whatever might have been happening in Somalia and Afghanistan. But excluding them is equiv- alent to assuming that their performance was exactly at the average for the group, and I would be surprised, to say the least, if this was true; I would think it was much worse. In the first four years of the present decade the growth of the bottom billion has picked up to around 1.7 percent, still far below that of the rest of the developing world, but markedly better in ab- solute terms. Unfortunately, however, this current improvement is likely due to the short-term effects of resource discoveries and high world prices

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for the natural resources that the bottom billion export. For example, the star growth performer among all the economies of the bottom billion has been Equatorial Guinea. This is a small country of coups and corruption where offshore oil was recently discovered and now dominates income. In sum, even if we were to treat these recent figures as hopeful, which I think would be a misinterpretation, the growth of the bottom billion remains much slower at its peak than even the slowest period of growth in the rest of the developing world and brings them about back to where they were in 1970.

Think about what these two sets of growth rates imply. During the 1970s the bottom billion diverged in growth from the rest of the develop- ing world by 2 percent a year. So even then the main feature of the societies in the bottom billion was divergence, not development. But the situation soon became alarmingly worse. During the 1980s the divergence acceler- ated to 4.4 percent a year, and during the 1990s it accelerated further to an astonishing 5 percent a year. Taking the three decades as a whole, the ex- perience of the societies in the bottom billion was thus one of massive and accelerating divergence. Given the power of compound growth rates, these differences between the bottom billion and the rest of the developing world will rapidly cumulate into two different worlds. Indeed, the diver- gence has indeed already pushed most of the countries of the bottom billion to the lowest spot in the global pile.

It was not always that way. Before globalization gave huge opportunities to China and India, they were poorer than many of the countries that have been caught in the traps. But China and India broke free in time to pene- trate global markets, whereas other countries that were initially less poor didn’t. For the last two decades this has produced a growth pattern that appears confusing. Some initially poor countries are growing very well, and so it can easily look as if there is not really a problem: the bottom ap- pears to be growing as fast as the rest. Over the next two decades the true nature of the problem is going to become apparent, however, because the countries that are trapped in stagnation or decline are now pretty well the poorest. The average person in the societies of the bottom billion now has an income only around one-fifth that of the typical person in the other de- veloping countries, and the gap will just get worse with time. Picture this as a billion people stuck in a train that is slowly rolling backward downhill.

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By 2050 the development gulf will no longer be between a rich billion in the most developed countries and five billion in the developing countries; rather, it will be between the trapped billion and the rest of humankind.

So far I have couched the problem of the bottom billion in terms of growth rates: these countries’ growth rate has been negative in absolute terms, and in relative terms massively below that of the rest of the devel- oping world. Nowadays, however, the talk is about poverty reduction and the other Millennium Development Goals, not about growth rates. Many of the people who care most about development feel more comfortable talk- ing about goals such as getting girls into school than discussing growth. I share the enthusiasm for getting girls into school, and indeed for all the other goals. But I do not share the discomfort about growth. While I was directing the World Bank’s research department, the most controversial pa- per we produced was one called “Growth Is Good for the Poor.” Some NGOs hated it, and it was the only time in five years that Jim Wolfensohn, the Bank’s president, phoned me to voice his concern. Yet the central prob- lem of the bottom billion is that they have not grown. The failure of the growth process in these societies simply has to be our core concern, and curing it the core challenge of development. For policies in the rich world to become more supportive of growth in these societies, we will need the full lobbying power of those who care about the world’s poor. And so the people who care will need to take another look at growth.

I am definitely not arguing that we should be indifferent to how an economy grows. The growth of Equatorial Guinea, for example, produces benefits for only a handful of its people, but this is exceptional; growth usually does benefit ordinary people. The exaggerated suspicion of growth by those who are concerned about development has manifested itself in the adjectives with which the word growth is now routinely encumbered. In strategy documents the word is now generally seen only in the context of the phrase “sustainable, pro-poor growth.” Yet overwhelmingly, the problem of the bottom billion has not been that they have had the wrong type of growth, it is that they have not had any growth. The suspicion of growth has inadvertently undermined genuinely strategic thinking. I re- member when one of the world’s great experts on banking consulted me because he had been asked to advise one of the countries of the bottom billion. He was struggling to come up with evidence that banking reform

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would directly help the poorest people in the country, because he sensed that without such evidence his advice would be dismissed. The much stronger evidence that it would help the growth process would not be val- ued, he felt. Getting growth started in the bottom billion is going to be hard enough even without such hindrances.

We cannot make poverty history unless the countries of the bottom bil- lion start to grow, and they will not grow by turning them into Cuba. Cuba is a stagnant, low-income, egalitarian country with good social ser- vices. If the bottom billion emulated Cuba, would this solve their prob- lems? I think that the vast majority of the people living in the bottom billion—and indeed in Cuba—would see it as continued failure. To my mind, development is about giving hope to ordinary people that their chil- dren will live in a society that has caught up with the rest of the world. Take that hope away and the smart people will use their energies not to develop their society but to escape from it—as have a million Cubans. Catching up is about radically raising growth in the countries now at the bottom. The fact that stagnation has persisted over such a long period tells us that it is going to be difficult. What can we do beyond caring?

Beyond the Headless Heart: Accepting Complexity

The problem of the bottom billion is serious, but it is fixable. It is much less daunting than the dramatic problems that were overcome in the twen- tieth century: disease, fascism, and communism. But like most serious problems, it is complicated. Change is going to have to come from within the societies of the bottom billion, but our own policies could make these efforts more likely to succeed, and so more likely to be undertaken.

We will need a range of policy instruments to encourage the countries of the bottom billion to take steps toward change. To date we have used these instruments badly, so there is considerable scope for improvement. The main challenge is that these policy tools span various government agencies, which are not always inclined to cooperate. Traditionally, devel- opment has been assigned to aid agencies, which are low in almost every government’s pecking order. The U.S. Department of Defense is not going to take advice from that country’s Agency for International Development. The British Department of Trade and Industry is not going to listen to the

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Department for International Development. To make development policy coherent will require what is termed a “whole-of-government” approach. To get this degree of coordination requires heads of government to focus on the problem. And because success depends on more than just what the United States or any other nation does on its own, it will require joint ac- tion across major governments.

The only forum where heads of the major governments routinely meet is the G8. Addressing the problem of the bottom billion is an ideal topic for the G8, but it means using the full range of available policies and so going beyond the Gleneagles agenda of 2005, which was a pledge to dou- ble aid programs. Africa is already back on the G8 agenda for the 2007 meeting in Germany. “Africa+” should rightly stay on the G8 agenda until the bottom billion are decisively freed from the development traps. This book sets out an agenda for the G8 that would be effective.

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32 K COPING WITH ANTI-GLOBALIZATION

32

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3

Globalization Is Good but Not Good Enough

hat, then, are the principal dimensions of an approach to making the beneficial globalization process work even bet- ter? I will sketch here the three principal prescriptions that

need to be kept in view: The beneficial outcomes are only what economists call a “central

tendency,” which is to say that they hold for the most part but not al- ways. They leave room for downsides, and we must have institutional mechanisms to cope with such adverse outcomes if and when they ma- terialize.

Also, we will want to go faster in achieving social agendas than glo- balization permits and facilitates. The question then is: what choice of policy and institutions will achieve that acceleration?

Finally, we can never forget also that a transition to more rewarding globalization requires careful steering and optimal speed of policy changes, not maximal speed à la the “shock therapy” of excessively rapid reforms that devastated Russia.

Handling Possible Downsides

Occasionally globalization will do harm that requires attention. We must create institutions and policies that either reduce the probability of such downsides or can be triggered so as to cope with them, preferably doing both. Let me illustrate.

Consider the recent concerns raised by some NGOs about the rap- idly proliferating shrimp farms along the coasts of India, Vietnam, Thai- land, and many other countries, including some in Latin America. I first

Globalization Is Good but Not Good Enough k 33

came across these concerns in my work for Human Rights Watch.1 It seemed a trifle odd that shrimp should be considered a human rights issue instead of being eaten and enjoyed! Besides, shrimp farming in India had led to substantial exports and had contributed to enhancing India’s growth and its fight against poverty, the eradication of which could be legitimately regarded as a human rights concern. On examina- tion, however, it was clear that this was precisely the sort of occasional downside of globalization of trade and direct investment that needed to be addressed. What was the problem?

Coastal shrimp far

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