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  • So, can we dare to be optimistic?

  • Well, the thesis of "The Bottom Billion"

  • is that a billion people have been stuck living

  • in economies that have been stagnant for 40 years,

  • and hence diverging from the rest of mankind.

  • And so, the real question to pose is not, "Can we be optimistic?"

  • It's, "How can we give credible hope to that billion people?"

  • That, to my mind, is the fundamental challenge now of development.

  • What I'm going to offer you is a recipe,

  • a combination of the two forces that changed the world for good,

  • which is the alliance of compassion and enlightened self-interest.

  • Compassion, because a billion people are living in societies

  • that have not offered credible hope.

  • That is a human tragedy.

  • Enlightened self-interest, because if that economic divergence

  • continues for another 40 years,

  • combined with social integration globally,

  • it will build a nightmare for our children.

  • We need compassion to get ourselves started,

  • and enlightened self-interest to get ourselves serious.

  • That's the alliance that changes the world.

  • So, what does it mean to get serious about providing hope for the bottom billion?

  • What can we actually do?

  • Well, a good guide is to think,

  • "What did we do last time the rich world got serious

  • about developing another region of the world?"

  • That gives us, it turns out, quite a good clue,

  • except you have to go back quite a long time.

  • The last time the rich world got serious

  • about developing another region was in the late 1940s.

  • The rich world was you, America,

  • and the region that needed to be developed was my world, Europe.

  • That was post-War Europe.

  • Why did America get serious?

  • It wasn't just compassion for Europe, though there was that.

  • It was that you knew you had to,

  • because, in the late 1940s, country after country in Central Europe

  • was falling into the Soviet bloc, and so you knew you'd no choice.

  • Europe had to be dragged into economic development.

  • So, what did you do, last time you got serious?

  • Well, yes, you had a big aid program. Thank you very much.

  • That was Marshall aid: we need to do it again. Aid is part of the solution.

  • But what else did you do?

  • Well, you tore up your trade policy, and totally reversed it.

  • Before the war, America had been highly protectionist.

  • After the war, you opened your markets to Europe,

  • you dragged Europe into the then-global economy, which was your economy,

  • and you institutionalized that trade liberalization

  • through founding the General Agreement on Tariffs and Trade.

  • So, total reversal of trade policy.

  • Did you do anything else?

  • Yes, you totally reversed your security policy.

  • Before the war, your security policy had been isolationist.

  • After the war, you tear that up, you put 100,000 troops in Europe

  • for over 40 years.

  • So, total reversal of security policy. Anything else?

  • Yes, you tear up the "Eleventh Commandment" --

  • national sovereignty.

  • Before the war, you treated national sovereignty as so sacrosanct

  • that you weren't even willing to join the League of Nations.

  • After the war, you found the United Nations,

  • you found the Organization for Economic Cooperation and Development,

  • you found the IMF, you encouraged Europe to create the European Community --

  • all systems for mutual government support.

  • That is still the waterfront of effective policies:

  • aid, trade, security, governments.

  • Of course, the details of policy are going to be different,

  • because the challenge is different.

  • It's not rebuilding Europe, it's reversing the divergence

  • for the bottom billion, so that they actually catch up.

  • Is that easier or harder?

  • We need to be at least as serious as we were then.

  • Now, today I'm going to take just one of those four.

  • I'm going to take the one that sounds the weakest,

  • the one that's just motherhood and apple pie --

  • governments, mutual systems of support for governments --

  • and I'm going to show you one idea

  • in how we could do something to strengthen governance,

  • and I'm going to show you that that is enormously important now.

  • The opportunity we're going to look to

  • is a genuine basis for optimism about the bottom billion,

  • and that is the commodity booms.

  • The commodity booms are pumping unprecedented amounts of money

  • into many, though not all, of the countries of the bottom billion.

  • Partly, they're pumping money in because commodity prices are high,

  • but it's not just that. There's also a range of new discoveries.

  • Uganda has just discovered oil, in about the most disastrous location on Earth;

  • Ghana has discovered oil;

  • Guinea has got a huge new exploitation of iron ore coming out of the ground.

  • So, a mass of new discoveries.

  • Between them, these new revenue flows dwarf aid.

  • Just to give you one example:

  • Angola alone is getting 50 billion dollars a year in oil revenue.

  • The entire aid flows to the 60 countries of the bottom billion last year were 34 billion.

  • So, the flow of resources from the commodity booms

  • to the bottom billion are without precedent.

  • So there's the optimism.

  • The question is, how is it going to help their development?

  • It's a huge opportunity for transformational development.

  • Will it be taken?

  • So, here comes a bit of science, and this is a bit of science I've done

  • since "The Bottom Billion," so it's new.

  • I've looked to see what is the relationship between

  • higher commodity prices of exports,

  • and the growth of commodity-exporting countries.

  • And I've looked globally, I've taken all the countries in the world

  • for the last 40 years,

  • and looked to see what the relationship is.

  • And the short run -- say, the first five to seven years -- is just great.

  • In fact, it's hunky dory: everything goes up.

  • You get more money because your terms of trade have improved,

  • but also that drives up output across the board.

  • So GDP goes up a lot -- fantastic! That's the short run.

  • And how about the long run?

  • Come back 15 years later.

  • Well, the short run, it's hunky dory,

  • but the long run, it's humpty dumpty.

  • You go up in the short run, but then most societies

  • historically have ended up worse than if they'd had no booms at all.

  • That is not a forecast about how commodity prices go;

  • it's a forecast of the consequences, the long-term consequences,

  • for growth of an increase in prices.

  • So, what goes wrong? Why is there this "resource curse," as it's called?

  • And again, I've looked at that, and it turns out

  • that the critical issue is the level of governance,

  • the initial level of economic governance,

  • when the resource booms accrue.

  • In fact, if you've got good enough governance,

  • there is no resource boom.

  • You go up in the short term, and then you go up even more in the long term.

  • That's Norway, the richest country in Europe. It's Australia. It's Canada.

  • The resource curse is entirely confined to countries

  • below a threshold of governance.

  • They still go up in the short run.

  • That's what we're seeing across the bottom billion at the moment.

  • The best growth rates they've had -- ever.

  • And the question is whether the short run will persist.

  • And with bad governance historically, over the last 40 years, it hasn't.

  • It's countries like Nigeria, which are worse off than if they'd never had oil.

  • So, there's a threshold level above which you go up in the long term,

  • and below which you go down.

  • Just to benchmark that threshold,

  • it's about the governance level of Portugal in the mid 1980s.

  • So, the question is, are the bottom billion above or below that threshold?

  • Now, there's one big change since the commodity booms of the 1970s,

  • and that is the spread of democracy.

  • So I thought, well, maybe that is the thing

  • which has transformed governance in the bottom billion.

  • Maybe we can be more optimistic because of the spread of democracy.

  • So, I looked. Democracy does have significant effects --

  • and unfortunately, they're adverse.

  • Democracies make even more of a mess of these resource booms than autocracies.

  • At that stage I just wanted to abandon the research, but --

  • (Laughter)

  • -- it turns out that democracy is a little bit more complicated than that.

  • Because there are two distinct aspects of democracy:

  • there's electoral competition, which determines how you acquire power,

  • and there are checks and balances, which determine how you use power.

  • It turns out that electoral competition is the thing

  • that's doing the damage with democracy,

  • whereas strong checks and balances make resource booms good.

  • And so, what the countries of the bottom billion need

  • is very strong checks and balances.

  • They haven't got them.

  • They got instant democracy in the 1990s:

  • elections without checks and balances.

  • How can we help improve governance and introduce checks and balances?

  • In all the societies of the bottom billion,

  • there are intense struggles to do just that.

  • The simple proposal is that we should have some international standards,

  • which will be voluntary, but which would spell out the key decision points

  • that need to be taken in order

  • to harness these resource revenues.

  • We know these international standards work

  • because we've already got one.

  • It's called the Extractive Industries Transparency Initiative.

  • That is the very simple idea that governments should report

  • to their citizens what revenues they have.

  • No sooner was it proposed

  • than reformers in Nigeria adopted it, pushed it and published the revenues in the paper.

  • Nigerian newspapers circulations spiked.

  • People wanted to know what their government was getting

  • in terms of revenue.

  • So, we know it works. What would the content be of these international standards?

  • I can't go through all of them, but I'll give you an example.

  • The first is how to take the resources out of the ground --

  • the economic processes, taking the resources out of the ground

  • and putting assets on top of the ground.

  • And the first step in that is selling the rights to resource extraction.

  • You know how rights to resource extraction are being sold at the moment,

  • how they've been sold over the last 40 years?

  • A company flies in, does a deal with a minister.

  • And that's great for the company,

  • and it's quite often great for the minister --

  • (Laughter)

  • -- and it's not great for their country.

  • There's a very simple institutional technology

  • which can transform that,

  • and it's called verified auctions.

  • The public agency with the greatest expertise on Earth

  • is of course the treasury -- that is, the British Treasury.

  • And the British Treasury decided that it would sell the rights

  • to third-generation mobile phones

  • by working out what those rights were worth.

  • They worked out they were worth two billion pounds.

  • Just in time, a set of economists got there and said,

  • "Why not try an auction? It'll reveal the value."

  • It went for 20 billion pounds through auction.

  • If the British Treasury can be out by a factor of 10,

  • think what the ministry of finance in Sierra Leone is going to be like.

  • (Laughter)

  • When I put that to the President of Sierra Leone,

  • the next day he asked the World Bank to send him a team

  • to give expertise on how to conduct auctions.

  • There are five such decision points;

  • each one needs an international standard.

  • If we could do it, we would change the world.

  • We would be helping the reformers in these societies,

  • who are struggling for change.

  • That's our modest role. We cannot change these societies,

  • but we can help the people in these societies

  • who are struggling and usually failing,

  • because the odds are so stacked against them.

  • And yet, we've not got these rules.

  • If you think about it, the cost of promulgating international rules

  • is zilch -- nothing.

  • Why on Earth are they not there?

  • I realized that the reason they're not there

  • is that until we have a critical mass of informed citizens in our own societies,

  • politicians will get away with gestures.

  • That unless we have an informed society,

  • what politicians do, especially in relation to Africa, is gestures:

  • things that look good, but don't work.

  • And so I realized we had to go through the business

  • of building an informed citizenry.

  • That's why I broke all the professional rules of conduct for an economist,

  • and I wrote an economics book that you could read on a beach.

  • (Laughter).

  • However, I have to say, the process of communication

  • does not come naturally to me.

  • This is why I'm on this stage, but it's alarming.

  • I grew up in a culture of self-effacement.

  • My wife showed me a blog comment on one of my last talks,