Paul Collier on Key Development Issues

At our Teaching the Global Economy at the RSA (London) in November 2012, the distinguished development economist Professor Paul Collier spoke on some of the leading development issues of the moment. A-level student Mark Austen was there to scribe some notes on the talk and the subsequent Q&A discussion. Here are his notes together with some connecting links and other resources. We hope that you find them useful.

The importance of institutions

Economics distorted by politics; institutions define success (Professor Collier recommends Acemoglu and Robinson: Why Nations Fail)

Importance of natural resource management:

• High commodity prices have led to greater exploration and discovery
• Potential for a natural resource curse
• Political tripod of economic stability:
  • Rules – Implementation of good policy
  • Institutions – capacity to institute rules
  • Citizenry – critical mass is required to support rules (importance of network effects?)
• Possible to develop rapidly with these attributes (e.g. post-war Germany)

Offshoring of manufacturing from China

• China’s share of exports (as a % of GDP) peaked in 2009; China is now exporting to production to elsewhere in Asia because of rising wages and a decision to move up the value chain
• Many developing countries find it difficult to break into manufacturing elsewhere: clustering effects in existing industries, established industries with external economies of scale
  • Buttons: 2/3 of all of the buttons in the world are made in one Chinese city
  • Cluster scale economies: attract purchases, share resources, support firms (external economies of scale)
• Chinese foreign direct investment is allowing the development of / scaling of manufacturing elsewhere including Africa

Land grabs

Two types of land grab:

1. Pioneer commercial investment: buying unused land at low prices to see if it is viable for production; risky but high-gain. Increases factor productivity; if successful, draws others – as such, it should be encouraged because there is a net benefit
2. Speculative acquisition of large areas of useless land: may not stay useless – option value. Investor hopes that the land will become useful in the long run (e.g. because of climate issues), causing the value to rise.

1^st type beneficial, 2^nd not: any gain to the investor is a loss to the country.

Urbanisation

• Rapid urbanisation in developing countries - a process with a long way to go
• High and rising population density increases productivity: doubling in size creates a 4-5% increase in productivity: increases living standards
• Needs to be more efficient; currently is often not.
• Density of economic activity and investment should increase towards the centre of a city; it often slumps because slums are inefficient (despite their large size they are single storey, meaning a low population density)
• Building standards from colonial era too high so are ignored completely
• No property rights make it hard to finance new housing projects
• In a healthy economy, 1/3 of the capital stock is housing; this is not the case in most poor countries, poor housing is a major impediment to achieving development goals and sustained growth

Ecology

• Africa is endowed with significant natural advantages – it is the best continent for solar / bio-fuel
• However these collide with the disadvantages:
• How fast should Africa green? Africa cannot wait 5-10 years for these renewable technologies to improve: energy investment is needed now
• Opportunity cost: Bio-fuel needs high quality cropland in order to grow with enough density to make harvesting cost-efficient. Africa is already a net importer of food and exporter of energy; this will be worsened by investment in bio-fuel.

Questions from the Floor

Impact of mobile phones in Africa

1. Mobiles provide a "leapfrog technology": poor landline connections mean high take-up (second largest mobile market in the world); facilitates spread of other tools
2. Decreased cost and increased availability of banking services (key in development – e.g. 19^th century Britain and building societies); e-banking and saving

China in Africa - benefits for African countries

• Increased demand and competition for commodities – increased revenues
• Decreased construction costs using Chinese firms
  • Use of Chinese labour means job creation is limited
• Benefits of competition to African firms? (Provided bidding is open)
• Imported cheap consumer goods from China
  • Decreased costs of production
  • May damage domestic firms (fledgling industry theory)
• Long term effects of Chinese investment:
  • Fast growth in Africa (e.g. 8% Sub-Sahara)
  • Natural resource depletion?
  • Loss of control over economies – foreign takeovers

China provides a net benefit for growth and development in Africa

Growth - The quality of rules

• Rules are only as strong as the monitoring of them
• Supported by institutions and populace but must still be appropriate
• One size does not fit all: e.g. African compliance with Western banking laws – limit credit (because of the over-leveraging of Western banks); not a problem in Africa – potential credit crunch
  • e.g. Building regulations; compliance must be affordable; appropriate levels – may need to be reduced (e.g. China)

Recent news stories:

‘Africa must rise above corruption, build strong institutions to develop’

Africans should reap the benefits of their resource bonanza (Globe and Mail, November 26th, 2012)