Paul Collier’s “The Bottom Billion” – Synopsis and Review

In Paul Collier’s “The Bottom Billion” (2008) Collier advertises the text as a guide on how to design the most effective G8 agenda in terms of reducing global poverty. To do this, he splits the world’s economies into three categories. Developed, Developing, and the Bottom Billion. The book is unsurprisingly aimed predominantly at helping the latter category. The Bottom Billion refers to the combined population of the worlds so called “failing states”, that are caught in a cycle of political unrest, economic stagnation, and falling levels of prosperity. From this point, the Oxford University professor highlights the causation for economic failure, the potential for globalisation as a saviour for these states, and an evaluation of the effectiveness of potential instruments that may be able to alleviate the level of poverty within these nations.

The first half of the book focuses on the reasons for why the poorest countries are failing. These reasons are split into four categories : Conflict traps, natural resource traps, landlocked with bad neighbours, and poor governance. To me, this section of the book was the least personal. Collier laid out the statistics of how much a typical civil war costs a country ($64), as well as describing the economic phenomenon of “Dutch Disease” (the negative impact of an inflow of foreign currency into a domestic market), and the importance of protecting economic reformers within failing states. However, at this point the chapters seemed more like a text book, rather than the personal plea that was so passionately argued in the preface.

Bottom_Billion_book_cover

The latter half of the book focuses on the plausibility of developed countries using instruments that may be able to create an economic climate more suited to growth within failing states. Unlike various other texts such as Jeffrey Sachs’ “The End of Poverty”, Collier does not take a clear political agenda that overshadows the book. He neither takes the left’s perspective of blindly throwing international aid at failing nations as a means of increasing social welfare regardless of its hinderance towards economic growth, nor the right’s perspective of aid being part of the problem of poverty as vehicle for “welfare payments to scroungers and crooks”.  Instead of choosing sides, Collier focuses on case studies of prior uses of instruments to reduce poverty, then evaluates their successes and relates these to their situation. For instance, the controversial instrument of military intervention within a failing state was analysed through two different case studies : the failure of Iraq, and the success of Sierra Leone, ultimately arguing that military intervention is an invaluable tool to maintaining post-conflict peace and therefore encouraging the economic security that is necessary to attracting private investment.

To me, the final chapter of the book was the most compelling. Here, Collier links the policy instruments described in the second half of the book, with their potential for effectiveness in alleviating the traps laid out in the first half of the book. The bringing together of the first and second halves of the book, culminated in the ultimate argument of the book – currently, governments are not fully utilising their whole arsenal of instruments that would be beneficial to encouraging development within the bottom billion. In other words, the over reliance on aid is a dangerous pit to fall into, as often blindly giving aid without conditions or targets does nothing to encourage domestic industry, as the injection is leaked out of the economy through imports. For the nations most in need of assistance such as Somalia, increased aid conditions, military and international organisation presence, and mutually beneficial trade deals will provide the ideal climate to encourage growth that will work to lift the nation out of disorder and into self-sufficiency. If governments want to see the level of change expected from the UN Millennium Development Goals, they should not measure the extent of their altruism by the GDP percentage dedicated to foreign aid, but rather measure their success by the actual progress that these countries are making. It is only then that these failing nations will begin to see true development.

Do Politicians Learn Anything From History?- 1 : “The Great Depression vs 2008 Crash” – ECONOMICS HISTORY

Could politicians have looked to the past to predict the 2008 Financial Crash?

Philosopher George Santayana famously quipped that “Those who cannot learn from history are doomed to repeat it.” In many ways, this is a motto adopted by politicians and investors alike world wide. If an institution is about to invest in capital or start a new scheme, surely it makes sense to look to the past and gain foresight through reflection.  Often, politicians can learn a great deal from the mistakes made by their predecessors, and act to not repeat them. Here, I will try to draw parallels between the causes of the Great Depression of 1929, and the causes of the Financial Crash of 2008, and therefore answer the question as to whether or not politicians did indeed learn from the past.

The Great Depression of the 1930s began on the 24th October 1929, when the American Stock Market crashed. However, this collapse did not come from nowhere; rather it was the inevitable consequence of decreased market regulation, investor over speculation, and overconfidence within the stock market. During the 1920s, wartime technologies (such as the radio and hoover) were seen as necessities rather than luxuries, hence increased output resulted in short run economic growth within America. This translated to the increase in value of share prices, averaging an increase of 20% per year in the 1920s. Banks were eager to lend out credit to potential investors because as long as the money was invested in the Dow Jones, investors would see their asset prices rocket, and therefore encourage investors and consumers alike to borrow even more credit from banks (40% of bank loans during the 20s were used to fund investment). This level of borrowing to fund investment meant that stock prices soon became overvalued, as investors would pump money into shares, which would in turn increase their value, and therefore encourage even more people to invest in these blue-chip stocks (ie General Motors). As credit was near limitless due to the lax monetary policy of the Federal Reserve, this process was able to repeat, leading to the creation of a stock market “bubble”.

Indeed, this bubble was able to develop due to the “Buy on the margin” scheme, which meant that that investors would only have to pay upfront 10-20% of a transaction in order to buy the shares, as the rest could be borrowed from a broker. This meant that only a small amount of “real” credit was used in stock transactions, meaning that for the first time the stock markets became accessible to the general public, rather than just the extremely wealthy. This in turn made the effects of the crash more widely encompassing.

Indeed, the growing bubble was further fuelled by a lack of government regulation within stock markets. Republican Presidents Warren Harding, Calvin Coolidge, and Herbert Hoover were great believers in Laissez-Faire economics, (the belief the Adam Smith’s invisible hand behind market forces will ultimately result in the optimum allocation of resources, and any government interference prevents this action). However, this interpretation of the Austrian School of Economics allowed for the forming of monopolies, as wealth inequality reached record levels. The reduced levels of regulation allowed for the stock markets to go unmonitored, allowing small elite firms such as JP Morgan to control vast amounts of the stock exchange, and manipulate share prices.

However by October 1929, investors began to realise the expanding difference between share price and actual share value. It became clear that stocks had become overvalued, hence, on October 24th 1929, share prices began to fall. Immediately, investors and the general public alike rushed to sell their stocks, resulting in 16,410,310 shares being sold on Black Thursday, to the tune of $40 billion, a fall of 12%.

The Dow Jones continued to decrease in value for another 3 years. Labour demand is derived from RNO, hence as output shrunk unemployment grew to 25%. The decrease in demand for labour meant that workers lost their bargaining power, so wages fell by 42%, which lead to a regressive decrease in living standards, hence inequality grew (show in the creation of “Hooverville” slums for the unemployed).

Black Thursday Newspaper
London Herald Friday 25th October – The effects of the Crash were felt worldwide.

Therefore, the Great Depression came from a culmination of overconfidence, the public’s newly found hobby of investment in shares, and a seemingly endless supply of credit from banks and brokers alike. These ultimately fuelled the bubble that would eventually collapse to cripple the worldwide economy (international trade fell by 65%). In my next blog on ECONOMIC HISTORY, I will analyse the causation of the 2008 Financial Crisis, and then draw parallels between the two events, to conclusively decide whether or not the politicians of 2008 did learn the lessons of history.