A tightening jobs market is a hugely powerful engine for poverty reduction

from The Hindu

D. Murali and G. Padmanaban

Chennai: Much has been talked about ‘fortune at the bottom of the pyramid’. But do we find big corporates discovering the ‘fortune’? Does it make good economics for the companies?

“At the very bottom of the pyramid there are no fortunes to be made because purchasing power is so low,” says Mr Paul Collier, Professor of Economics and Director of the Centre for the Study of African Economies at Oxford University.

“Further up the pyramid, however, there is huge scope for introducing such things as brands,” he adds. “Brands are essentially mechanisms for enabling consumers to know the quality of the goods they purchase because companies with brands are investing in building reputation,” elaborates Mr Collier.

So, some of the features of a market economy that superficially look utterly wasteful – such as advertising – actually have the potential to perform an important function for poor people, he argues, in an e-mail interaction with Business Line.

Earlier this month, Mr Collier’s book, ‘The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It’ (www.oup.com), won the $15,000 Lionel Gelber prize for the best book on international affairs. Jury chair Barbara McDougall, Canada’s former secretary of state for external affairs commended the book for providing “a penetrating reassessment of why vast populations remain trapped in poverty, despite endless debate over foreign aid policy among wealthy countries and institutions.”

Global poverty is actually falling quite rapidly for about eighty percent of the world, but the real crisis lies in a group of about 50 failing states, the bottom billion, whose problems defy traditional approaches to alleviating poverty, Mr Collier observes.

His past and current research has centred on addressing developmental challenges facing low-income countries, including research on the economics of conflict, governance and macro-economics with a strong focus on the effects of aid, exchange rate and trade policies. Mr Collier has served as Director of the Development Research group at the World Bank as well as Senior Adviser to former Prime Minister Blair’s Commission on Africa.

Excerpts from the interview.

What should be the top priorities of India to remove poverty in the country?

I am not an expert on the Indian economy… However, looking from the perspective of an outsider, I would stress that a tightening jobs market is a hugely powerful engine for poverty reduction. In turn, the key engine for jobs growth is urban. So I would focus on trying to unblock whatever might be constraining the expansion of employment in urban services and manufacturing.

Offshoring currently happens to China and India on cost considerations. Do you see this as a key ingredient in poverty reduction?

‘Offshoring’ is just a politically slanted word for describing trade in services. Like other job-intensive exports it enables ordinary people at both ends of the transaction to gain. Indians gain from the job opportunities and consumers such as myself gain from lower prices and better service. Potentially it is a key ingredient of poverty reduction in those societies with few other options.

I would like to see the impoverished landlocked countries exporting these services. For example, in France where ‘offshoring’ has been bitterly resisted, it is impossible to get a business to answer the phone outside the narrow confines of the 35-hour week. Yet French-speakers in landlocked Africa are among the poorest people on earth because they have no job opportunities.

Does micro-credit have a role to play in poverty reduction?

Yes, but it is to an extent the latest fashion. The bottom billion face several distinct problems that need to be addressed by different strategies, and so I get suspicious whenever I hear single solutions being proposed.

Of late, India has been a witness to protests by farmers against the acquisition by companies of land for factories and export zones. Your comment on what the bottom billion has to ‘trade’ for development.

This takes us back to your first question. India needs urban jobs and for this it will need to transfer some land from agriculture. The reallocation of land should be so beneficial to the economy that it should be possible to provide generous compensation for those who are displaced.

Can you explain briefly about the four ‘traps’ you talk about?

Let me make clear straightaway that India is very obviously not in any of these traps. But some societies are in several of them. Here they are.

One is internal conflict, which in economic terms is development in reverse. It is a trap because once started it is highly persistent and even when peace returns the legacy is usually a heightened risk of further conflict.

Another trap is being resource-rich. Paradoxically, this has usually created major problems because it tends to undermine governance.

A third trap is being landlocked without valuable resources and being surrounded by neighbours who are also in one of the traps. Such countries have few opportunities to reach middle-income levels.

The final trap is to have a small and ill-educated population and to start off with poor policies and governance. Such small societies take longer to sort themselves out, perhaps because they lack a critical mass of informed citizens.

Among the four traps which is the most difficult one to handle? Why?

Being landlocked is perhaps the most difficult trap from the perspective of what the society itself can do, because viable strategies largely depend upon neighbours.

On Dutch disease.

Perhaps too much fuss is made about Dutch disease. For example, aid can be used to lower the costs of exporting, say by improving transport infrastructure, and this offsets any direct Dutch disease effect.

(For starters, here is a snatch from Wikipedia about the phrase: “Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive… It can also refer to ‘any development that results in a large inflow of foreign currency, including a sharp surge in natural resource prices, foreign assistance, and foreign direct investment.’ The term was coined in 1977 by ‘The Economist’ to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s.”)

What are the limitations of external aid? Where can such aid be effective?

One limitation is in the resource-rich countries currently in the throes of commodity booms: they don’t need more money, they need better governance.

Another limitation is where government-spending systems are corrupt or highly inefficient, so that aid channelled through them fails. However, the answer here is not to stop aid but to innovate with new institutional arrangements for spending money effectively.

I have suggested an approach called ‘Independent Service Authorities’ which I think would be appropriate for the most difficult environments and I would like to see it piloted in the spirit of an experiment that could then be evaluated.

Do we have to trace all current problems to colonial rule?

Colonialism was invariably an insult to people’s dignity, and sometimes it was economically ruinous as in the Belgian Congo. But the economic legacy of colonialism was pretty mixed: some societies were lifted by colonialism and in others such as Ethiopia the colonial exposure was so brief as to be negligible in the totality of their long history. Ethiopia is among the poorest nations on earth but not because of a few years of Italian occupation.

Blaming colonialism for ills that are due to the choices of current ruling elites is often used by those elites as a stratagem for distraction. It is also sometimes used by class warriors in the west whose interest is to denigrate their own ruling classes rather than to think through a serious analysis of what is happening in the societies of the bottom billion.

Your views on how India and Pakistan have grown in the 60 years of Independence. And China, in comparison.

India is an extraordinary society because it is rare for low-income countries to make a sustained success of democracy as India has done. Both India and China have now made the transition to successful economic strategies, and although India took a little longer, China still faces the daunting task of making a successful political transition. Pakistan has evidently made neither transition. Its intellectual elite surely needs to do a lot of soul searching.

What type of trade practices do you think can strengthen Africa’s market economy? Will regional trade agreements help countries in the subcontinent too?

Africa has a much smaller population than India yet it is split into 53 countries with high trade barriers against each other both legal, such as tariffs, and extra-legal, such as roadblocks. This is obviously a nightmare. However, even if all of Africa were to be integrated the market would still be much smaller than that of India.

So Africa also needs to integrate more successfully into the global economy. Other than for primary commodities, Africa is now so far behind Asia that it probably needs some temporary privileged access to European markets in order to pump-prime manufactured exports. Recently it has been given such access to the American market and the African export response has been considerable.

How can the bottom billion be empowered and made self-sufficient?

By ‘self-sufficient’, I take it that you mean reaching a level of income at which aid is unnecessary, rather than in the sense that they literally only consume things that they themselves produce - the latter sort of self-sufficiency would be idiotic. For the bottom billion to reach income self-sufficiency, ‘empowerment’ is the right word. In all these societies there are brave people struggling for change and it is incumbent on the rest of us, who are so much more fortunate, to do whatever we can to strengthen their chances of success. For that we need to get serious.

Aid is part of the solution but alone it is likely to be insufficient. It needs to be complemented by generous use of trade policies, supportive use of voluntary international guidelines on good economic governance, and by the generous provision of peacekeeping troops who are sometimes vital to give these societies the stability that is necessary to get economic recovery started.

To date the international community has not got sufficiently serious. We have had a parade of gesture politics designed to make particular politicians look good to their own electorates rather than actually addressing the traps that constrain these societies.