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Aid And Reform Notes

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AID AND REFORM 'The Bottom Billion' Collier 2007


'I think the sad reality is that although globalisation has powered the majority of LDCs towards prosperity , it is now making things harder for the latecomers.'


Trade o 'trade based on primary commodity exporting is likely to generate quite a lot of income inequality.' o Manufacturing is labour intensive - opposed to export ↑ LD
- 'Since the defining characteristic of LDCs is that they have a lot of unproductive labour, these exports are likely to spread the benefits of development more widely.' o Economies of agglomeration
- 'once activity started to relocate [from US/Europe → Asia], agglomerations grew in low wage Asia.'


'if the first firm is profitable, so are its imitators.'


'These agglomerations became famously competitive; low wages combined with scale economies. Neither the rich countries nor the bottom billion could compete. The rich countries had low wages and the bottom billion, which surely had low wages, did not have the agglomerations. They had missed the boat.'
- Why did this happen in Asia and not Africa.'


2/3 are landlocked and/or resource rich.


During the 1980s, only 4% of the coastal, resource scarce countries were free of debilitating configurations
- Basically just Mauritius


'each year of being free of the gross failures of governance and policy added significantly to the success of export diversification.'
- ''The countries that stopped shooting themselves in the foot were able to break into new export markets.'


'It seems likely, however, that the process of breaking in is now harder than before Asia managed to establish itself on the scene.'


'The expectations of continued failure reinforces the pressure for the brightest people to leave.'
- When will the boat come back?


'The bottom billion will have to wait a long time until development in Asia creates a wage gap with the bottom billion similar to the massive gap that prevailed between Asia and the rich world around 1980.'


'So the growth of agglomerations in Asia has made the export diversification route more difficult for the bottom billion.
- Also 'Asians are increasingly desperate to secure supplies of natural resources'
- 'But don't count on trade to help the bottom billion. Based on present trade, it seems more likely to lock yet more of the bottom billion countries into the natural resource trap than to save them through export diversification.'


Capital o 'The economies of the bottom billion are short of capital.' o 'Africa has twice as much public capital as private capital' - aid.
- 'lack of private investment 'condemns workers to being unproductive and so to having low incomes.'

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'The labour force of the bottom billion needs private capital, and in principle globalisation can provide it.' o Why are the most capital scarce countries not attracting a large capital inflow?
- Poor governance and policy.
- High perceived ask of investment
- 'risk ratings take a long time to reflect turnarounds.'


'often things have to get really bad before they provoke incisive change.'


Typical economy of the bottom billion is very small - absorbing information is costly.


'policy improvements are often genuinely fragile.'


'Fundamentally, the problem is one of credibility.'
- 'The government needs to create a convincing signal of its intentions, and to do this it has to adopt reforms that are so painful that a bogus reformer is simply not prepared to adopt them.' o Capital outflows
- 'Much of this is illegal, and so it is hidden. It is called capital flight.'
- 'Africa integrated into the global financial economy, but in the wrong direction: the most capital scarce region in the world exported its capital.' Why?


Corruption


Poor opportunities for investment. Migration o 'People vote with their feet as well as with their wallets.' o 'migration decisions of educated people looked very like the portfolio decisions that determine where wealth is held, and not much at all like the migration decisions of the uneducated, who are more likely to migrate the wider the differential between their earnings at home and what they can earn abroad.'
- 'an exodus of educated people.'
- 'emigration helps those who leave, but it can have perverse effects on those left behind, especially if it selectively removed the educated.' 'The traps still await them. As long as they have low incomes and slow growth they continue to play Russian roulette.' Collier suggests 5 international charters o A charter for natural resource revenues
- 'If we could ↑ the effectiveness of resource revenues even to the present level of aid effectiveness, the impact would be enormous.'
- Spell out key features of an effective process to decide who is allowed to extract the resources
- Big oil companies could bear part of the risk instead of the small poor countries
- Make all payments of revenue transparent


'Unless citizens know what money is coming in, they have little hope of scrutinizing how it is used.'
- Transparency in public expenditures
- Rules for smoothing public spending in the face of revenue shocks. o A charter for democracy: o A charter for budget transparency
- Spending on health clinics in Chad - 99% of money didn't reach its intended destination. o A charter for post conflict situations

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