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Five Steps to Sustainable Governance in Africa

Interviewee: Paul Collier, professor of economics, Oxford University
Interviewer: Stephanie Hanson, News Editor, CFR.org
June 27, 2008

Paul Collier, a professor of economics at Oxford University and the author of The Bottom Billion, discusses policy options for helping the poorest countries in Africa. He says "there are severe limits on what we as outsiders can do," but suggests the United States should work on developing a set of international guidelines for natural resource management. He goes on to outline five steps to put African nations on a path toward better internal management of resource wealth. He is deeply concerned about the current food crisis and advocates that the United States should eliminate biofuels subsidies and that the European Union should get rid of its ban on genetically modified crops.

Is there a model for a bottom billion country that is doing things right?

Tanzania is doing pretty well, both economically and politically. Nigeria came through a very rough election, which was indeed very marred, but there’s now quite a strong group within the country trying to build proper checks and balances. There are also, obviously, still a lot of crooks around. So there’s a very vigorous internal struggle. But I would think that Nigeria may well win through, because Nigeria’s got the big advantage over most countries of the bottom billion, that it’s a big society.

It has a critical mass of things like newspapers. It’s easier to get institutions of accountability in a big society because people realize things have to be institutionalized. It’s easier to move away from the personal. And Umaru Yar’adua, the new president, seems to be very keen to do that. He’s a very modest man. He’s clearly got this agenda of, “It’s the institution, not the person.” And that’s very rare, actually. That’s been the classic mistake of presidents in the past: Even when they’ve been good presidents, they’ve regarded it as a personal agenda and themselves as the personal savior of the nation, rather than trying to build an institution which is robust.

Your research suggests that for a change to happen, it must come from within a country. So what can be done to cultivate those sorts of reformers—the people who think about institutions rather than individual agendas?

There are severe limits on what we as outsiders can do. These are internal processes. Our role is just to do as much as we can to strengthen the position of the forces for change within these societies. In the case of a country like Nigeria, the dominant issue is: Can they handle natural resource revenues well? What I’ve been trying to promote is the idea of a set of voluntary international guidelines on the key decision points. There are about five key decision points, which, if they’re taken right, you’ll get sustained development.

Can you outline those?

You can think of the economic process underlying it as very simple. It’s taking assets from out of the ground and you want to end up with assets on top of the ground. You can just think of a logical sequence of steps along that way.

"Nigeria’s got the big advantage over most countries of the bottom billion, that it’s a big society. It has a critical mass of things like newspapers. It’s easier to get institutions of accountability in a big society because people realize things have to be institutionalized."

The first is, as you take the assets out of the ground, how do you sell the rights to resource extraction? We know how they’ve been sold in the past. It’s been pretty crooked. There’s an agency problem, which is the corruption problem. But there’s also an asymmetric information problem, which is a fancy way of saying the companies have got more clue as to what these rights are worth than the government has. And there’s a simple institutional change which would solve both of those problems—to sell the rights through auctions.

Step two is more important, and that’s to have a decent tax system of the resource rents. Most countries don’t. These are rents—they’re not the same as, say, the profits of a manufacturing firm. Taking valuable resources out of the ground is extracting a rent. And that rent should accrue to the citizens of the country, not to the company.

Step three is about what you can do with [the revenues]. You can save quite a large part of them. You need to save a much higher share of the revenues from resource depletion that you do from ordinary tax revenues, precisely because you’re depleting an asset. If you don’t save it, you’ve got an unsustainable source of revenue.

[Fourth,] you have to move from savings to productive investment. The typical African worker has the lowest capital stock to work with in the world. Africa needs investment within the country—public investment, infrastructure. So that savings has to be transformed into investment within the country.

The final rule is that honesty isn’t enough. You can be honest but dumb. You need to scrutinize public investments before you commit yourself to them—to find out what the likely rate of return is. That’s a technical assessment. And that technical assessment needs to be done in the country. But the technocrats need to be protected, again, by some international verification.

What state or international body do you think would be best equipped to enforce these standards, or at least promote them?

Enforcement is the wrong word. There’s no way you can tell these resource-rich countries what to do. You can’t use aid conditionality because they don’t need the money. So it would be entirely voluntary. Maybe different parts of these standards will be appropriate with different organizations.

What about the African countries which aren’t resource-rich? There are a lot of landlocked countries without natural resources that are dependent on their neighbors. What recommendations do you have for strengthening regional ties within Africa?

"[H]onesty isn’t enough. You can be honest but dumb. You need to scrutinize public investments before you commit yourself to them—to find out what the likely rate of return is."

Some of the problems of the landlocked are really of asymmetric power—that the landlocked are at the mercy of their coastal neighbors. I think there’s a role for the donor community to try and enforce, through aid conditionality, good behavior on the part of the coastal countries. For example, Kenya has been manifestly failing to maintain good road networks for Uganda. And Kenya won’t do that unless the costs to Kenya of not doing so are considerable. That means Kenya would have to lose a lot of aid if it failed to maintain that road. That’s not something that Uganda can do, but it is something that the international donors can do. And paradoxically, the mantra of the last decade in donor policy, which has been country ownership and decentralizing all decisions to the country level, has thrown away the potential for using aid to encourage and enforce regional cooperation.

China is a growing presence on the African continent and could throw a wrench in any aid conditionality. What is your feeling on China’s investment in Africa?

China’s arrival on the scene is, in many respects, very good news for Africa. It’s pushed up commodity prices and it’s pushed down the cost of manufactured goods. So Africa is able to buy very cheap goods and get very high prices for its exports. The Chinese are an inadvertent charity in that they’re so big in the world that they manage to turn the terms of trade powerfully against themselves. That has shifted quite a lot of the benefits of Chinese growth from China to Africa.

So we start with a big plus. The minus, of course, is that we’ve got the scramble for Africa part too, with China racing everyone else to the bottom in terms of standards of governance. So it’s important to try and pull back from that and agree [on] a set of common standards. If we try and get China to adhere to our standards, we’ve lost. But if we try and build a common set of standards with China, then that well might be feasible. Because the Chinese have always taken the long-term view and it’s not in China’s interest to build a new vintage of fragile states, some of which then fall into insecurity.

What role do you see for individual African countries, or even groups of countries working together? Do you think that they could encourage that set of standards?

African governments are very bad at collaborating with each other. There’s a fair amount of theater, but at the practical level there are intense rivalries, often personal rivalries. And so, there is radically less cooperation at the regional level than in most other regions. If Europe is the benchmark, it is astonishing.

"Europe very much wants the United States to lift the biofuels subsidy. And the United States very much want Europe to lift the ban on GM. And so it seems to me there’s a win-win deal here."

Suppose we compare, say, Germany and Burundi. The German economy is four or five hundred times as big as the economy of Burundi. But only one of those two governments has sovereign power over its own exchange rate, its own monetary policy, its own trade policy, its own fiscal policy, and allows no right of appeal above the jurisdiction of its own courts. That, of course, is the government of Burundi, not the government of Germany. So here’s a country—and it’s typical—with an absolutely tiny economic unit, being run by massive excess sovereignty.

Another thing I wanted to discuss with you is this idea of reducing trade barriers temporarily to allow African countries to be more competitive with Asia. How would that be implemented?

Since writing The Bottom Billion, I’ve done more work on this with Tony Venables. There’s an article we published in a journal called The World Economy, in summer 2007. There we compare the effects of AGOA [African Growth and Opportunity Act], the American scheme, with the Everything but Arms, the European scheme. And we show that even in AGOA, it’s only where there’s a special waiver which permits more generous rules of origin that the scheme has worked. That covers garments, which is the really important commodity. Africa’s exports of garments to America have increased seven-fold as a result of this scheme in just a five-year period. That suggests some African countries were pretty close to the threshold of breaking into global markets, and just needed that extra bit to get them over the threshold. Over the same period the European scheme was a total failure. Garment exports to Europe actually fell absolutely over that period. The reason was that the European scheme applied to the wrong countries. It was confined to the so-called “least developed.” That’s a United Nations classification, but it’s not appropriate for manufacturing. We need a UN classification of “least developed manufacturing country.” But of course, nobody’s actually done that yet.

Do you see any similarly simple policy changes that the United States could make that would have outsized effects on improving things for the bottom billion?

My main concern at the moment is to puncture this food price crisis. It’s serious because the groups that are getting hit hardest are the urban poor. If we run with these high food prices, say, for another five years, which is the sort of thing people are talking about, we’ll have a whole vintage of young Africans that are permanently impaired. So it’s a vital matter to get food prices back down quickly. America holds the key to that.

The key is in the Farm Bill? Or food-aid policy?

They key is in biofuels. The United States is burning 30 percent of its grain. It uses ten units of energy to produce eleven with biofuels. So you only get one additional unit for ten being put in. But you put a subsidy on all the eleven units that are produced. So it’s an absolute gift horse for the agricultural lobby, which is of course why it’s there. Europe has an equivalent folly, which is the ban on genetically modified crops. In Europe, I’m advocating lifting that ban.

In fact, Europe very much wants the United States to lift the biofuels subsidy. And the United States very much want Europe to lift the ban on GM. And so it seems to me there’s a win-win deal here. Not only would Europe and America win in themselves, but between them, they’d make a great contribution to resolving the food crisis for Africa, because the elimination of the biofuels subsidy would puncture the present bubble. And lifting the ban on GM would change the rate of growth of agricultural productivity.

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