Still the Bottom Billion

• Author: Glenn Gottselig
• Position: Staff of F&D
• Pages: 4-7

Page 4

Glenn Gottselig interviews Oxford economist Paul Collier

F&D: In a recent presentation to IMF economists, you spoke about the macroeconomics of the bottom billion. What do you see as the macroeconomic challenges that these countries have in common?

COLLIER: I think the countries of the bottom billion, the low-income countries, are distinctive not just in terms of having on average fewer good policies than the middle-income countries; they’ve got different problems. So good policies in those environments would just look different from good policies in middle-income environments, and that’s not sufficiently recognized. Let’s start with what the key differences are between a low-income economy and a middle-income economy. Out of those differences will emerge different strategies and different responses.

The overarching difference is that these countries are desperately capital scarce. The implication of that is that they need to go through a prolonged phase of high investment. For the moment, in Africa the average investment rate to GDP is less than 20 percent, whereas to catch up, to converge with other economies, it needs to be over 30 percent. So they must move from under 20 to over 30. That’s a big change.

F&D: How can we do that?

COLLIER: It means an agenda of raising the capacity to invest productively. I call that a phase of investing in investing. It is something that has partly a macroeconomic agenda, but also a microeconomic agenda. If we just say it’s hopeless, the country doesn’t have a capacity to invest, it drives them into what I call the economics of Polonius: “Neither a borrower nor a lender be.” The economics of Polonius was always mocked. In Hamlet, ShakespearePage 5 set Polonius up as a pompous fool, basically. For low-income countries, neither a borrower nor a lender be would be ruinous, because they could never finance the move to investment rates above 30 percent.

Of course, in moving up investment rates and borrowing, we don’t want to repeat the debt crisis, so investment has to be done much better than it is at the moment. That is the strategy for investing in investing, building the capacity to make good investments. And it is something that the Fund can’t do on its own. It’s largely a microeconomic agenda, and so the macro depends upon the micro. The IMF needs to work with the agency responsible for that micro agenda, which is largely the World Bank. Of course, in principle the IMF does this, but in practice not enough. The two institutions need to work on a common core agenda of investing in investing, which is something that might take about three years working with governments to get the capacity for good investment decisively raised.

So capital scarcity is the over-arching defining feature of low-income countries, but it’s not the only distinctive feature. Typically, they are resource rich, and this raises issues also of savings and investment. Countries are depleting their natural assets as they extract resources, and because commodity prices are very volatile, the revenue stream is very unpredictable. Such circumstances call for savings and investment strategies that are distinctive to low-income countries.

The objective of reducing absolute poverty—the only objective for the bottom billion—is one from which we’ve been diverging for 40 years from the rest of mankind. The primary focus must be on convergence. They’ve got to catch up; that means they must grow faster than other developing countries. And for that they need investment rates that are at least commensurate with the successful developing countries.

A third feature that makes these low-income countries distinctive is that they need to live down the past. The past has usually been rough, and so these countries often lack good reputations, especially with investors. Given this situation, they need commitment technologies—by which I mean some mechanism through which these countries commit beforehand to certain actions to be taken later and, thus, can build credibility. Part of the IMF’s core business is providing commitment technologies via conditions inherent in lending programs.

Finally, there is typically low...