PDF Summary:The Bottom Billion, by Paul Collier

About one billion people around the globe live in persistent poverty—in countries where the economy is constantly struggling and incomes are stagnant or shrinking. In The Bottom Billion, British economist Paul Collier argues that traditional economic theories and development aid programs have paid too little attention to these countries," instead focusing on emerging markets that don’t require help from the West to grow.

The “bottom billion” are stuck in “poverty traps,” and will stay stuck, unless governments, aid agencies, international organizations, and private charities work together to craft policies to help them overcome these traps.

In this guide, we'll explore Collier's four traps and his four remedies, compare his views to those of other economists and policymakers, and examine how conditions for the bottom billion have changed since the book’s publication.

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1. Set superior policy. For example, Lebanon became a financial hub for the Middle East because of its pro-business posture.
2. Take advantage of exports via airplane freight and e-commerce opportunities by setting proper regulatory policy. This can help compensate for lack of access to bridges and seaports.
3. Be a good investment. Violence, corruption, and instability scare off would-be benefactors like the World Bank and IMF. Curbing these forces can entice loans and financial aid.
4. Encourage remittances (expatriates sending money back to their native country) by making cross-border banking easier.

Helping the Landlocked: The Vienna Programme of Action

Since publication of The Bottom Billion, the United Nations has launched an initiative to assist landlocked nations in facing their unique challenges. The Vienna Programme of Action for Landlocked Countries (VPoA) is a decade-long program initiated in 2014 to help the 32 nations classified as landlocked.

The program helps facilitate transport agreements between landlocked nations and with neighbors who have access to the sea, expanding opportunities for trade and reducing transit costs.

It has also encouraged another one of Collier’s proposals by emphasizing growth in Information and Communication Technology (ICT). As a result, Armenia’s ICT sector, for example, grew by 38% in 2017.

Becoming Landlocked: The Colonial Partitioning of Africa

The seemingly arbitrary national boundaries that make economic and political development in modern Africa difficult can be traced back more than a century.

In the late 1800s, European powers discovered the potential of Africa as a reservoir of natural resources that could be used to fuel the Industrial Revolution. In what became known as “The Scramble for Africa,” these nations competed for territorial claims to the continent. This mad dash culminated in the Berlin Conference of 1884, where 13 European nations and the United States met to divide up Africa.

The result was a set of national boundaries with scant regard for the African people or their tribal, linguistic, and cultural divisions. Most of the boundaries drawn at the Berlin Conference lasted through the era of colonialism and independence and are still in effect today. These national divisions form a persistent problem that is largely unique to Africa. 16 African countries are landlocked, by far the most of any continent.

Trap #4: Poor Governance and Failed States

As the final trap, Collier identifies poor governance as a problem that reinforces poverty and low growth. Incompetent government hinders economic growth or even leads to ruin.

Corruption

Due to corruption, many of the poorest countries in the world have leaders who are among the richest people in the world. For example, the daughter of Angola’s president is a billionaire despite the fact that half of Angolans earn less than $2 a day.

(Shortform note: According to Transparency International's Corruption Perception Index, the three most corrupt nations are South Sudan, Syria, and Somalia. Together, they have an average GDP per capita income of just $964.)

The Mix of Petrodollars and Corruption

In Crude World: The Violent Twilight of Oil, journalist Peter Maass examines the interplay of oil money and corrupt governments in a handful of countries, including the tiny African nation of Equatorial Guinea. His findings reveal how brazen much of the malfeasance is.

In 1994, Equatorial Guinea had a GDP per capita of $210. But following its discovery of oil reserves in the mid-1990s, GDP per capita ballooned to nearly $23,000 by 2008. Nearly all of the new wealth went straight into government coffers, however, and very little reached regular citizens. As of 2006, 75% of the country still lived in poverty.

So, what did Equatorial Guinea’s leaders buy with the windfall? Federal prosecutors in America have some clues. In 2014, the US Justice Department reached a settlement agreement with the son of Equatorial Guinea’s president, Teodoro Obiang, relating to more than $30 million of embezzled assets. Per the agreement, the US government seized a Malibu mansion, a Ferrari, and a collection of Michael Jackson memorabilia. In return, Obiang was allowed to keep suspicious assets outside of the US, including a private jet and one of Jackson’s diamond-encrusted white gloves.

This kind of lavish spending is common among oil-exporting countries like Russia, Saudi Arabia, and Nigeria.

Why Change Is So Hard

Collier notes that many good people try their best to achieve reform, but are often overpowered by vested interests. For example, in the bottom billion nations, dictators often replace honest civil servants with people who are willing to do their personal bidding. Collier argues that this is why the bottom billion need outside assistance.

75% of the bottom billion live in nations that have at some point been categorized as a failing state.

(Shortform note: Collier neglects to define “failing state,” except to say that they scored extremely low for at least four straight years on a Brookings Institute index that ranks 20 components of governance and policy.)

Attempts at Reform in Kenya

In It’s Our Turn to Eat, journalist Michela Wrong recounts the efforts of Kenya’s former anti-corruption czar John Githongo to clean up malfeasance in the African nation. The story illuminates the price that many reformers pay for trying to fight corruption in their home countries.

In Kenya, corruption runs deep. The average citizen pays 16 bribes a month to government officials—the price of doing business in a bottom billion country. To turn things around, Githongo set his sights on Anglo Leasing and Finance Company LLC, which received 16% of the Kenyan government’s expenses. As it turned out, Anglo Leasing was a shell company used to line the pockets of government officials and their cronies. For his efforts to expose this corruption, Githongo was forced into exile in Britain. In Kenya and many other bottom billion countries, whistle-blowing is considered an act of treason.

The power of vested interests and the status quo substantially reduce the probability of failed states correcting course. According to Collier’s statistical analysis, the likelihood of a failed state having a sustained turnaround in a given year is only 1.6%. The average failing state stays in this category for 59 years.

(Shortform note: Although building better institutions is difficult, it is more feasible than changing a nation’s geography or culture. While overturning the status quo in failed states rarely happens, Why Nations Fail provides a blueprint for the institutional design that allows nations to develop. The authors argue that “inclusive institutions” are what separates economic development in rich and poor countries.)

Part 2: Remedies for the Bottom Billion

Having explained the four factors that trap the bottom billion in poverty, Collier then discusses four remedies he believes the West and poor nations can apply to break those poverty traps: foreign aid, military intervention, laws and charters, and trade policies.

(Shortform note: Collier doesn’t emphasize political reforms as strongly as other scholars. He also believes in refocusing on economic growth, rather than on more “photogenic” social priorities like holding elections and increasing school enrollment.)

Remedy #1: Foreign Aid

The first remedy Collier examines is foreign aid, which he argues can be useful to spurring growth among bottom billion economies under the right circumstances. Among poor nations, Collier estimates that foreign aid adds about a percentage point to annual GDP. For many nations, receiving foreign aid in any amount prevents their living standards from getting worse. However, Collier believes that aid can go further when it’s used intentionally.

In Collier’s view, most traditional approaches to foreign aid focus on a “one size fits all” strategy of providing aid to all extremely poor nations. Collier believes this strategy fails to consider how foreign aid interacts differently with each poverty trap. He tailors his foreign aid strategy to account for the disparate impact these traps have on the effectiveness of the aid. In this section, we’ll explain the traditional approaches of using foreign aid, then explain how Collier’s approach would differ.

Aid and Conflict

Traditional approach: Collier’s own analysis suggests roughly 11% of traditional foreign aid winds up funding the recipient country’s military, and that 40% of Africa’s total military budget comes from aid. Collier says that foreign aid does not increase the chance of civil war, but it does slightly increase the risk of a coup in conflict-prone countries—presumably because the foreign aid boosts the government revenue that bad actors want to appropriate.

Collier’s approach: Collier argues that aid to conflict-prone regions needs to be disbursed with caution. Aid earmarked for specific projects or aid in the form of technical assistance may be more appropriate for conflict-prone countries.

(Shortform note: Other experts argue that foreign aid can prevent conflict by strengthening security and defense, stabilizing the government, and creating bonds between donor and recipient countries.)

Does Foreign Aid Fund Terrorism?

A 2018 investigation revealed that foreign aid dispensed by the United Nations has wound up in the hands of the terrorist group al-Shabaab. According to the investigation, the terrorists use taxation and extortion to gain control of cash cards distributed to displaced people in Somalia.

For example, terrorists control many roads and checkpoints and charge a toll to travelers who have received foreign assistance. The terrorists also operate a protection racket, charging businesses and aid groups to assure their safety. While stories like this do occur, Collier stresses that most foreign aid does go to people in need.

Aid and Natural Resources

Traditional approach: Collier finds that aid isn’t very useful for nations that have an abundance of natural resources. In these places, aid acts similarly to revenue from resource rents (the difference between the price of a commodity and the average cost of producing it), and two things can happen: Bad decision makers waste the revenue, or they experience Dutch disease.

Collier’s approach: He argues that rather than receiving foreign aid, resource-rich nations are better off focusing on reforming laws and charters (which Collier discusses as his third poverty trap remedy) and crafting better trade policy.

(Shortform note: While Collier is highly skeptical of aid to oil-rich nations, there is some evidence of positive effects even in countries with large oil revenues. A UN working paper examines the beneficial effects of aid to Indonesia, which has achieved sustained economic growth despite its combination of oil and foreign aid.)

Aid for the Landlocked

Traditional approach: Because of the unique challenges they face, foreign aid is typically a big priority for landlocked nations. Collier agrees that foreign aid is vital to landlocked nations to increase consumption and improve basic living conditions.

Collier’s approach: To spur broader economic development, Collier urges these nations to use the aid on transportation infrastructure, which will help address landlocked nations’ difficulty accessing trade markets, in addition to humanitarian objectives.

(Shortform note: For example, landlocked Zambia is dependent on foreign aid for basic health care services. Although foreign aid to Zambia has yet to lift it out of its poverty traps, it has achieved some of the modest humanitarian successes Collier sees as crucial. Poverty rates are falling, fewer children have been stunted by malnutrition, and incidences of HIV have dropped by half since 2000.)

Aid and Bad GovernanceTraditional approach: Another failed strategy is aid that is contingent upon policy. To Collier, forcing countries to adopt policies they would otherwise reject usually fails. This is because aid “conditionality” is based on agreements, not follow-through.

Collier’s approach: Collier admits bad governance makes foreign aid largely ineffective. Therefore, he says foreign aid for the worst governments is unwise, and the West needs to focus on the other remedies (laws and charters and trade policy).

While Collier doesn’t support forced policy changes as a condition of aid, he does advocate “governance conditionality,” which links aid to achieved improvements in governance.

Collier suggests a strategy for when poorly governed states show improvement:

1. Provide technical assistance (trained foreigners with expertise) as soon as there are signs of reform.
2. Provide monetary assistance once recipients are better governed and better equipped to use it properly. Providing monetary aid too soon is a mistake, because it’s often misused during government transitions.

(Shortform note: A 2018 research paper argues that any negative effects of aid on quality of governance have been exaggerated, and that donors can take steps to minimize negative effects, such as providing resources for budget support.)

US Contribution to Foreign Aid

Collier argues that foreign aid is misunderstood in the West both by average citizens and many policy makers, muddying the waters around the debate about increasing or decreasing the aid budget.

Polls show that Americans vastly overestimate the amount the US spends on foreign aid, with many people believing it constitutes around 25% of the federal budget. When asked how much they’d like it to be, those polled said around 10%. As it turns out, foreign aid accounts for only around 1% of the federal budget, indicating much of the American public would support increasing the budget if they knew its current size.

Most rich nations have pledged to commit around 0.7% of GDP to foreign aid, but only a handful of countries meet or exceed this commitment. About 0.2% of US GDP goes to foreign aid, which ranks near the bottom among OECD nations, although the total amount ($39.2 billion in 2019) ranks first.

Remedy #2: Military Intervention

Next, Collier argues that military intervention is an important tool for Western governments to prevent violence in susceptible nations. Although these interventions are controversial, Collier argues that when done properly, the benefits substantially outweigh the costs. When Western nations dismiss the option entirely, the results can be catastrophic.

Collier says military interventions serve three functions:

1. Restoring order
2. Keeping the peace
3. Insuring against coups

Restoring Order

According to Collier, Western governments have an obligation to intervene in failing states lacking a functioning government. There is, of course, a risk to Western troops tasked with restoring order. However, Collier believes the costs of not intervening are far greater, both to the bottom billion, who languish in disorder, and to Western nations that face the repercussions of terrorism and epidemics that arise from the chaos.

Collier highlights Somalia, a case where a sustained military intervention would have worked well. Instead, the American military intervened in 1993 when the government collapsed, but then withdrew after negative public reaction to 18 American casualties. By 1995, there were 300,000 Somali casualties. When Collier’s book was published in 2007, Somalia was still without a functioning government. Additionally, Somali refugees have gone on to commit acts of terror in the West.

Mission Creep in Somalia

While Collier says that pulling out of Somalia was a mistake, many consider the events in Somalia a case of mission creep—the tendency of military leaders to keep broadening the scope of their mandate.

In 1992, President George H.W. Bush sent 28,000 troops into Somalia to help feed starving children. Then, a group of them stayed as part of a UN peacekeeping initiative. Given the success of these objectives, the US military took on the task of trying to chase down the warlord Mohamed Farah Aideed. The mission culminated in two American helicopters being shot down, and the failure prompted President Clinton to withdraw troops from Somalia.

Collier argues that this decision led to later inaction in response to atrocities.

Keeping the Peace

In addition to restoring order, Collier believes Western military forces acting as peacekeepers can reduce the likelihood of violent relapse following a civil war. These are situations in which Collier contends that foreign governments and their citizens welcome military intervention. For example, British forces intervened in Sierra Leone when rebels took UN workers hostage. With only a few hundred troops, Britain was able to disband the rebel group.

(Shortform note: British troops intervened in Sierra Leone in 2000, when rebels rejected a peace agreement and threatened Sierra Leone’s capital. They were able to repel the insurgency, and stayed for two years to oversee the democratic transition that occurred in May 2002.)

Insurance Against Coups

Militaries can also intervene when the threats of coups arise. Collier proposes Western governments work in alliance with the African Union to make this practical. The African Union could supply legitimacy to the interventions, and the West could provide the manpower. As things are now, European governments with troops stationed in unstable regions often step aside and let coups happen, for fear of overstepping their authority. Collier acknowledges that following the US war in Iraq, there is little appetite for military interventions. But in these three capacities, he believes they can be helpful.

Critics Question the Effectiveness of Military Intervention

William Easterly believes military intervention is unlikely to act as insurance against coups (as Collier argues) because coups often happen too quickly for the West to be able to respond. He also considers it misguided for Collier to assume that deploying troops to Rwanda, for example, would have prevented the atrocities that occurred. Finally, Easterly says people in poor nations grow skeptical of foreign aid when it’s combined with a military component, and they may see it as a pretext for occupation.

Other scholars argue that interventions in Africa to thwart terrorism have failed. They contend that military operations that result in civilian casualties only fuel extremist groups, as does Western support of oppressive governments.

Remedy #3: Laws and Charters

Collier argues that his third remedy—changes to laws and international norms—is the most cost-effective way to help the bottom billion. Both laws and charters can improve growth by requiring or incentivizing poor nations’ governments to be more ethical and transparent.

Western Laws

Collier says Western nations can change their own banking laws and regulations to reduce bottom billion corruption in two ways:

First, they can require reporting of suspicious or corrupt transactions from abroad to authorities. The West already does this with transactions tied to terrorism. It can expand to include corrupt bottom-billion money.

Second, they can enforce the laws against bribing foreign officials, which have usually been overlooked.

(Shortform note: Only in 1997 did the Organisation for Economic Co-operation and Development (OECD) require its member nations to make bribing a foreign official illegal. In fact, Western contractors are notorious for bribing foreign governments to secure contracts.)

International Charters

International charters can help economic growth by providing a roadmap for proper conduct and prudent policy. While they’re not enforceable by law, Collier argues charters use peer pressure to improve behavior. Collier identifies five areas where establishing norms via international charters, or voluntary pacts among nations, can be effective.

Natural resource revenues: This might include competitive bidding for contracts, transparency in spending funds, and spreading some of the risks of price shocks to companies rather than governments through negotiated contracts and insurance policies.

Democratic norms: Collier suggests emphasizing a free press, since this has been shown to substantially reduce government waste, fraud, and abuse.

Budget transparency: Publishing how government revenue is spent, and the results of those expenditures, is crucial to accountability.

Peacekeeping: This charter would lay out standards for international security efforts and foreign aid.

Investment: A charter on investment would make rules for adjudicating disputes between governments and investors, as well as include a mechanism for investor insurance.

Amnesty International on Fighting Corruption

Amnesty International, an organization devoted to exposing and fighting corruption, has an annual Corruption Perceptions Index, which ranks countries on their levels of corruption. Unsurprisingly, the worst performers on the index are mostly bottom billion nations.

Similar to Collier’s idea of voluntary charters, Amnesty International advocates for “Integrity Pacts” to improve transparency and accountability. Contractors, bidders, and a third-party watchdog sign the pact to adhere to specified standards in the procurement process.

Additionally, Amnesty International has devised a set of strategies for cracking down on the West’s complicity in paying bribes to secure government contracts:

• Develop protections for whistleblowers and public registers that reveal the owners of foreign assets.

• Strengthen criminal liability for companies committing bribery.

• Ensure transparency in foreign bribery settlements, and compensate the victims.

Remedy #4: Trade Policy

Collier believes trade policy can be a helpful tool in alleviating poverty. As they’re designed now, though, Collier is critical of both rich country and poor country trade policies, arguing they both hurt the bottom billion by stifling competition, rewarding inefficient businesses, and making exports more difficult. He explains how various well-intentioned policies backfire.

Rich Country Trade Policies

When rich nations subsidize their own farmers (as the US does with cotton and sugar, for example), Collier says this pushes out farmers in poor countries whose livelihoods rely on producing and exporting these crops. Also, when processed materials suffer higher tariffs than raw materials, poor farmers are discouraged from processing their exports (which would increase their revenues).

Subsidizing American Farmers

The US government has been subsidizing American farmers since the Great Depression and the Dust Bowl of the 1930s. Today, federal aid to farmers consists of direct payments, crop insurance, and loans. Proponents of these policies argue that they protect farmers from price swings and natural disasters, and allow America to grow its own food rather than relying on imports.

Critics argue that transfers go mainly to wealthy farmers and that subsidizing production encourages an increase in supply, which leads to lower prices and more subsidies for farmers. In 2000, more than 40% of net farm income came from government payments, a peak since the programs were implemented.

Collier and others argue that the West would be better off repealing these subsidies and forcing domestic farmers to compete for themselves. The bottom billion could benefit from producing crops, and consumers in the West would pay lower prices.

Collier argues that the “fair trade” practice of companies paying more than market value for their raw materials to help poor farmers backfires, too. This practice (which is equivalent to a charitable transfer), encourages farmers to keep farming low-priced crops rather than pursuing more lucrative options. The combination of subsidizing domestic farmers while also subsidizing bottom billion farmers is a contradiction, and Collier says poor farmers are better off with neither policy.

Starbucks and FairTrade

Collier disagrees with organizations like FairTrade International, which operates a labeling initiative that certifies that products have met a set of social, economic, and environmental standards. Collier believes that well-intentioned efforts like these usually backfire. Although specific FairTrade standards vary by commodity, most have a series of similar requirements, some of which include:

• A Fair Trade premium: Buyers pay a specified percentage above the market price, called the “community development premium” or “social premium,” which is meant to be used for investments in local communities.

• Standards for working conditions: Child labor is usually prohibited, and workers are free to unionize.

• Environmental standards: The use of some chemicals is prohibited, and producers must provide summaries of the environmental impact of their production.

The purpose of fair trade is to improve the living conditions of poor farmers. Proponents argue it provides farmers with stability from price shocks and prevents large corporations from exploiting poor farmers in developing countries. However, Collier and other critics argue that fair trade is merely charity that keeps farmers producing the crops that “have locked them into poverty,” and prevents them from making the difficult but necessary business decisions that would enable them to become more profitable on their own.

Bottom Billion Trade Policies

Poor nations also hurt themselves through imprudent trade policies, like tariffs of their own and regional trade agreements. According to Collier, while trade barriers in poor countries are harmful enough on their own, they are even more dangerous when combined with foreign aid. When people use foreign aid (which is paid in foreign currency) to buy imports (which are purchased in foreign currency), the aid triggers Dutch disease as tariffs artificially raise import prices.

Regional trade pacts modeled on the European Union are largely futile as well, Collier says, because most poor African nations are too similar to benefit much from trade with one another. The EU model worked because of the differences among trading partners: some were rich and had high demand for manufactured goods, and some were poorer and had low labor costs in manufacturing. The rich received low-cost goods, and the poor received higher wages. As Collier points out, a collection of low-income, stagnant African economies only makes a larger low-income, stagnant economy.

Africa’s Newest Free Trade Agreement

In 2018, 54 African nations ratified the African Continental Free Trade Agreement (AfCFTA). The trading bloc, if fully implemented, would be the largest of its kind. Although Collier was critical of regional trade agreements in his book, he said in a 2018 interview that the AfCFTA was a “very important step forward” because it would enlarge markets for the smallest African states.

The World Bank predicts the AfCFTA can lift 30 million people out of extreme poverty, and would improve incomes of 68 million additional Africans. The agreement would also cause incomes of both skilled and unskilled workers to rise, and lead to wage gains for women of more than 10%.

Although regional trade agreements between a few small nations may be rather ineffectual, this continent-wide bloc may be large enough to provide the kind of diversity Collier argues is necessary for all of its members to benefit. While having great potential, scholars argue that the AfCFTA’s success will still hinge on the policies and regulations that are implemented and enforced.

Trade That Works

Collier advocates two main priorities in trade:

1. Lowering tariffs and other barriers between rich nations and poor nations.
2. Protecting the bottom billion against China.

He says sub-Saharan Africa needs protection from Chinese competition to offset China’s agglomeration advantage. Collier suggests keeping the West’s tariffs on China as is, and eliminating those placed on African nations.

(Shortform note: The recent US tariffs imposed on Chinese goods may inadvertently help the bottom billion by giving them the relative advantage to American markets that Collier advocates.) Collier says the bottom billion are uniquely positioned to achieve economic growth through exports. Evidence shows African markets alone are too small to foster the competition necessary to increase productivity. Diversifying exports provides larger markets and is shown to increase economic growth.

(Shortform note: Because so many poor nations specialize in one or a few commodities, they are susceptible to price shocks that can rapidly reduce incomes. Research indicates that export diversification helps economic growth by protecting against these price fluctuations.)